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Published 10 November 2021
The UK Government has published its first draft legislation dealing with commercial rent liabilities during the Covid-19 pandemic, as well as a new Code of Practice that came into effect yesterday.
Following a press release announced yesterday morning, the Government has since published its first draft of the Commercial Rent (Coronavirus) Bill together with an accompanying new “Code of Practice for commercial property relationships during the Covid-19 pandemic”.
The Code of Practice replaces the old Code introduced in June 2020 and updated in April 2021. It is designed to support – and to be read along with – the key provisions in the Bill.
The Bill will apply in respect of unpaid rent, service charge and insurance arrears relating to the ring-fenced period, of tenants who:
The ring-fenced period is from 21 March 2020 to the last date formal restrictions (not guidance) were removed from each tenant’s sector.
A detailed summary of the ring-fenced periods and the businesses affected can be found in Annex A to the new Code of Practice. For the most part the period lasts from 21 March 2020 until at least 12 April 2021 (although the period for certain sectors runs up to 18 July 2021 in England and 7 August 2021 in Wales).
To allow for time to pass the legislation, the existing moratorium on forfeiture for non-payment of all rents, winding up petitions for ring-fenced debt and CRAR restrictions are set to remain in place until 25 March 2022.
Once the legislation comes into force, the moratorium on forfeiture, CRAR and winding up petitions will continue in respect of ring-fenced debt from 25 March 2022 until either (a) an arbitration award is made; or (b) the deadline to apply for arbitration expires with no application being made (currently forecast to be 25 September 2022). This is referred to as the “moratorium period” in the Bill.
The scope of the temporary moratorium will also be extended to debt proceedings, i.e. landlords will be unable to issue court proceedings for recovery of ring-fenced debt during the moratorium period.
The moratorium is also expected to have retrospective effect in two important ways:
a. In any court proceedings issued on or after 10 November 2021 relating to ring-fenced debt, the parties will be entitled to apply for a mandatory stay to enable the debt to be resolved by other means (whether by arbitration or otherwise).
b. For any judgments obtained on or after 10 November 2021, any part of that judgment relating to ring-fenced debt cannot be enforced during the moratorium period and should be resolved by other means (whether by arbitration or otherwise).
It is also expected that landlords will be prevented from drawing down on tenancy deposits to cover outstanding ring-fenced rental arrears. Where they have already done so, tenants’ obligation to top up their rent deposits will be suspended.
The Arbitration Act 1996 will apply to the arbitration process, subject to the modifications set out in Schedule 1 to the Bill.
Parties will have 6 months to apply for the arbitration scheme after the legislation comes into place (i.e. by 25 September 2022, assuming legislation is enacted on schedule).
It is anticipated the process will involve the following steps:
a. The Letter of Notification
The landlord or tenant must notify the other of its intention to pursue binding arbitration, together with a proposal for settlement of rent arrears (supported by evidence on viability and affordability if appropriate).
The other party may respond and either accept the proposal, or submit a counterproposal.
The initial party will then have a period of time to respond, which could include submitting a new proposal.
b. The Application
An application is then made by either party together with a fee payable. The amount of fee is still to be confirmed, but is expected to be on a sliding scale relative to the size of rental arrears owed. The application must include the Letter of Notification, their proposal for resolution and relevant supporting evidence as above.
c. The Response
The other party has 14 days to submit its own proposal, together with their relevant supporting evidence.
Both parties then have the opportunity to submit further proposals, based on the legislative principles. The arbitrator will also have the power to request further evidence from either party.
d. The Hearing
Both parties will then be given the opportunity to elect for a public hearing. If neither party asks for a public hearing, the arbitrator will consider the matter on paper.
If a hearing is requested, the arbitrator will seek to conduct one within 14 days of receipt of a request. The hearing should last for no more than 6 hours.
e. The Award
The arbitrator will notify parties of their decision within 14 days of the hearing. Their decision will be based on whichever proposal is most consistent with the legislative principles. The arbitrator’s award will be legally binding.
Landlords and tenants are in the meantime encouraged to negotiate agreement on payment, regardless of whether or not accrued rental debts fall within scope of the Bill.
The Government has reinforced that the legal starting position remains the same in that tenants are liable for their payment obligations under leases, unless renegotiated by agreement with landlords or if relief applies as a result of the arbitration process.
Where a viable tenant is seeking to deviate from its payment obligations, it will need to demonstrate why the payment is unaffordable and what payment or period might otherwise be affordable in the near future. This should be supported by evidence that substantiates the need for assistance (examples of which are found in Annex B to the Code).
While each matter depends on its own merits, the Government anticipates most agreements should see debts over a period of no more than two years.
The new legislation also introduces a set of principles that are designed to underpin the whole process – from negotiating repayment agreements to determination of an arbitration award. These can be found in Section 15 of the Bill and Paragraph 50 of the Code and are broadly summarised as follows:
a. The underlying aim is to preserve viable tenant businesses, which should not be at the expense of the solvency of the landlord; and
b. Where tenants can do so, they must continue to meet their lease obligations in full, and any relief given should be no greater than necessary.
As part of this, the Government has made it clear what sort of behaviours it expects to see from landlords and tenants. These are set out in Paragraph 49 of the Code and are geared towards transparency and collaboration, a unified approach, acting reasonably and responsibility and trying to find a swift resolution.
The Bill is not law yet. Having only just passed its First Reading, it still has a number of stages to get through before it will be in force. Similarly, the Code of Practice is not (as yet) binding, although parties are still strongly encouraged to adhere to it.
It is however a strong sign of things to come, and may give parties pause for thought on enforcement action meantime, particularly in light of the potential retrospective effect it is intended to have.
Of course this only relates to ring-fenced arrears, and any relief afforded by the new legislation will only apply where tenants genuinely cannot afford to pay. The reality is that most tenants have been back trading for a number of months now, and many have already reached agreement with their landlords on repayment. So it remains to be seen what impact the legislation will have in practice once it comes into force.
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