Real Estate - Tip of the Month – February 2023

Published 22 February 2023

“What did we learn, Palmer?...I guess we learned not to do it again”: Looking back on the Commercial Rents Arbitration Scheme

Next month will mark a year since the Covid arrears arbitration scheme introduced by the Commercial Rents (Coronavirus) Act 2022 (CRCA) came into effect.  The deadline for new applications to the scheme in September 2022 has long since passed, however awards under the scheme (Awards) are continuing to be published (with at least a further 13 so far this year, 6 of which have been published this month) as the tail end of applications make their way through the process. 

The arbitration scheme was introduced on the back of a series of government measures to try to support businesses who suffered as a result of the impact of Covid lockdowns in 2020 and 2021 (see our previous recap in our article here). 

The scheme was designed to facilitate the resolution of commercial tenant arrears accrued over these periods.  As part of this, a balance had to be struck: on the one hand, entitling viable tenants who genuinely needed support to some form of relief to help preserve their businesses; and on the other, recognising that any relief should be no greater than necessary (meaning tenants who could afford to should still pay their rents in full).

News of the scheme – as well as the extended moratoriums on recovery of arrears -   was met with controversy when it was announced, given the uncertainty of the process and the risk it posed to a focused recovery of the commercial property sector.  By that point, it was felt that most landlords and tenants had already reached agreements regarding relief and/or repayment of Covid arrears; and for those who hadn’t, there were concerns that the scheme would be used by opportunistic parties to delay and frustrate payment discussions even further. 

Despite these concerns, there was surprisingly very little take-up at least in the initial months.  CoStar News reported in August 2022 that, according to a Property Litigation Association poll, only 5% of 242 property litigators polled had been instructed to make a referral under the scheme: a far cry from the circa 7.5k referrals that the government was apparently expecting.   

There was - perhaps less surprisingly - a surge of last-minute applications in the run up to the September 2022 deadline, albeit (as far as we know) still nowhere near the levels that the government had anticipated. 

Several of those applications have since been determined, and at the time of writing, we have seen a total of 54 Awards published by various scheme providers.  While each dispute turned on its own merits, some interesting common themes have emerged:

• as expected, most of the Awards we have seen published to date are as a result of references made by tenants;

• strict compliance with the CRCA was essential: some references were for example dismissed as a result of a failure to follow the specific CRCA requirements when it came to submitting a formal proposal along with each reference;

• if a tenant was viable and could afford to repay its debts (with assessments as to affordability being made at the time of the decision, and not necessarily at the time of the Covid lockdowns), then it should not expect to get any automatic right of relief via the scheme. Several Awards have determined that tenants be given no relief on that basis and that the debts should be paid in full;

• where some relief was needed, taking the time to get the balance right with a sensible, realistic and reasoned proposal was worthwhile in terms of managing recovery strategy: in some cases, for example, those landlords who were prepared to accept some waiver or deferred payment plan typically found favour; whereas tenant proposals that asked for too much relief relative to their affordability were deemed to not be consistent with the CRCA principles;

• where neither proposal was consistent with the CRCA, but the arbitrator was still convinced some relief should be given, then in the absence of any detailed evidence of affordability, arbitrators have typically tried to meet in the middle.  A common approach seems to have been to award relief in the form of a circa 50% rent waiver and circa 6 – 12 month deferred repayment plan regarding the balance;and

• parties who failed to properly take part in the process were penalised. For example, one tenant who failed to engage in an arbitration was criticised for conduct that was “manifestly unreasonable” and ordered to pay 100% of the arbitrator’s fees.  The key limitation, however, is that arbitrators only had discretion to make awards regarding payment of their fees: the CRCA precluded parties from being able to recover their own legal costs, even if they were successful. 

We will probably see more Awards being published in the coming weeks and months before the scheme finally peters out.  It has undoubtedly been a useful model for those tenants who have faced uncooperative landlords and who have genuinely needed support.  For the most part, however, Covid arrears will already be a thing of the past for many landlords and tenants, and take up in the scheme has been nowhere near on the scale expected.  

Closing the door on the scheme will therefore mark the final farewell to Covid-linked commercial rent discussions for most parties, leaving them to focus on a whole suite of new challenges and opportunities arising in the commercial property sector in the year ahead.