Tenants and landlords of commercial property in England are currently evaluating newly published details regarding the proposed new ringfencing and arbitration procedure that will apply to tenants who owe rent arrears that were accrued during the COVID-19 pandemic.

The government has published a draft Bill with a Code of Practice that outlines the new laws. These laws require landlords make allowances for arrears and share their effects with tenants – for instance, by agreeing with their tenant to waive a portion of the amount owing or to accept a long-term payment schedule.

If they are unable to reach an agreement, an arbitration procedure is initiated, which is legally binding and presided over by approved private arbitrators.

These are the key points:

• Tenants whose businesses were legally forced to close under COVID restrictions will be affected by new laws.  
• These will be applied to arrears of rent that were accrued during the period beginning around 21 March 2021, and ending when COVID restrictions applicable for the tenant’s particular industry sector were completely removed. The period when limited trade were carried on could be included as only partial restrictions were in effect.  
• “Rent” includes insurance rent, service charges and interest for late payments.
• Rent that has been paid or a contract between landlord and tenant regarding its payment is deemed to be complete, then the new rules will not apply. Tenants cannot reopen negotiations under the new rules.

The new rules set a six-month time limit for arbitration. If the deadline is not met, landlords have the usual remedies, including forfeiture, suing for rent and using the Commercial Rent Arrears Recovery procedure.

The landlord and tenant must have exchanged their proposals within the time frame of six months as to how much and when arrears should be paid. It is important to start this process early enough that if it fails, the landlord and tenant can still initiate arbitration within six months.

There is limitation on landlords to file a money claim in courts before the six-month period is over to collect rent arrears.

The new laws will prevent landlords from flooding the courts with money claims to stop them from flooding the courts before the changes take effect. Any such claims that are filed after 10 November 2021 (the date that landlords first became aware of the new laws), will be stayed and will not be allowed to proceed. The new laws will not apply to landlords who have filed a money claim prior to 10 November 2021.

Arbitration is required to consider the new Code of Practice factors. This includes evaluating the impact of any decision on the viability of the tenant and whether any reduction of arrears will affect the landlord’s solvency. Accordingly, the arbitrator has substantial powers. He can, for example, write off arrears and allow instalments up to two years.

The decision of the arbitrator is usually based on the submitted documents. However, either the landlord or tenant can request an oral hearing lasting up to six hours. This hearing must take place within 14 days.

Arbitrations should usually take between one and two months. This is partly due to the fact that the arbitrator will follow the guidelines set out by the parties in their proposals made during the 28-day process.

Operative date

• To be announced

Recommendation

Commercial landlords need to assess whether arrears of rent owed to them are subject to the proposed new arbitration and ring-fencing process. They should also determine the outcome they desire in relation to each tenant and gather evidence that will induce the arbitrator or tenant to that outcome, under the new Code.

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