This is a new Act which came into force on 25 March 2022. Otherwise known as the “rent ring-fencing” Act, it provides commercial tenants whose businesses were forced to close during the COVID-19 pandemic with a period of continued protection against action by their landlords to recover unpaid rent, service charge and insurance rent (plus interest) which fell due during the Protected Period (see below for definition of the Protected Period) (“Protected Rent”).
The “Protected Period” is the period which starts on 21 March 2020 and ends when the restrictions ended (being either a closure requirement or specific coronavirus restriction) for the business carried on by the Tenant at the premises. For example, in England, for non-essential retail this was 12 April 2021 but for hospitality this was 18 July 2021.
The new Act, which should also be read in conjunction with the Government Code of Practice for commercial property relationships following the COVID-19 pandemic (published on 9 November 2021), provides for a binding Arbitration procedure to resolve outstanding disputes between commercial landlords and tenants over this Protected Rent. It is therefore essential for commercial landlords and tenants who have businesses in retail, hospitality and leisure to know how this Act operates and what rights it introduces.
For some time, in order to protect business tenants hit by the COVID-19 pandemic, the Government introduced and extended detailed rules which prevented landlords from taking certain enforcement action e.g. forfeiting leases for non-payment of rent and issuing Winding Up Petitions. The main Landlord powers of enforcement for non-payment of rent ended on 25 and 31 March 2022 in England (in Wales the rules are slightly different). For Protected Rent only, the new Act replaces those restrictions with a “moratorium” which currently prevents landlords from exercising their powers of recovery until the latter of either 25 September 2022 or the completion of an Arbitration (so long as the Arbitration was referred prior to 25 September 2022). (Note that Act allows for extensions of the moratorium period).
The new Act aims to protect viable businesses and prevent further COVID-era Insolvencies. It is intended to protect businesses which are genuinely unable to pay their rent in full due to the effect of the pandemic-and whose businesses would otherwise be viable.
Note the Act only applies where landlords and tenants have thus far been unable to reach agreement on what the tenant should pay during the Protected Period (so does not apply to the many tenants who were able to secure “rent concessions” with their landlords). Also, the tenant must not already be in an Insolvency process.
The idea is that where tenants cannot pay in full, landlords and tenants should share the burden-striking a balance between preserving both businesses.
How does it work?
The Act only applies to business which were “adversely affected by coronavirus” (i.e. they had to close between 21 March 2020 and 18 July 2021-7 August 2021 in Wales).
Either party must first notify the other that they intend to apply for Arbitration under the Act in relation to the Protected Rent (a “Letter of Notification”). The other party has 14 days to respond-if they don’t then the first party can refer the matter to Arbitration within 28 days of the Letter of Notification. If the other party does respond within 14 days the first party can reply themselves within 14 days-after which either one can refer the matter to Arbitration. The Arbitration referral must include details of a formal proposal to the other side accompanied by supporting evidence. The other side then has 14 days to put forward a counter proposal, also accompanied by supporting evidence. Either party can then submit a revised proposal within 28 days of their original proposal.
Either party can request an oral hearing-and the Arbitrator must make an award within 14 days of it (so no waiting months for a decision as can often sometimes happen in Court proceedings). The Arbitrator will use the parties’ formal proposals as a guide when making his award-but is able to depart from both.
The Royal Institute of Chartered Surveyors (RICS), the Chartered Institute of Arbitrators and the Dispute Resolution Ombudsman (amongst others) have all been selected by the Government to be an Approved Arbitration Body so they are able to appoint Arbitrators under the Act.
The Arbitrator can either:
- Write off the whole or part of the debt
- Give the tenant more time to pay (e.g. in instalments)(up to 24 months from the date of the award).
- Reduce or cancel any interest which would otherwise be due on unpaid sums.
It is worth noting that court proceedings for Protected Rent which commenced prior to 10 November 2021 will not be affected by the Act-although proceedings started between then and 25 March 2022 are still likely to be “stayed” or frozen by the Court.
What criteria does the arbitrator apply when reaching their decision?
In basic terms the Arbitrator will look at the viability of the tenant’s business when making an award, to ensure that this is preserved so far as it is consistent with also preserving the landlord’s solvency. However, it seems that where the tenant’s business would still be viable if it were to pay the Protected Rent in full, then this is what the Arbitrator will award.
Arbitrators will be required to consider detailed financial information upon both parties and their businesses including details of assets and liabilities and the specific impact that COVID-19 had on their business. The Arbitrator must disregard the possibility of either party borrowing money or restructuring their business. The Arbitrator will most likely be assisted by expert accountancy evidence.
What will it cost, and who pays?
An Approved Arbitration Body must publish the fees payable on its website. For example, the RICS has created 4 procedures depending on the size and complexity of the dispute ranging from a fixed fee of £850 for simple cases and where the debt is below £20,000 to an hourly rate fee and agreed total fee for disputes worth over £500,000.
The party who makes the original referral must initially pay the Arbitration fees. Each party must meet their own legal and other costs. However, when the Arbitrator makes an award they can order that their fees be paid proportionately between the parties.
Once an award is made, if it is not complied with, the Landlord can use its usual powers of enforcement under the relevant lease since the award is treated as altering the terms of the tenancy to the extent of the award e.g. the landlord can forfeit the lease for non-payment.
One can expect tenants will want to delay any referral as long as possible whilst landlords will want to make the referrals as soon as possible.
Whilst one wonders just how many landlords and tenants have still not, by the end of March 2022, resolved disputes over unpaid rent which fell due 1-2 years ago, it is hoped that this Arbitration procedure will now encourage settlement of the remaining disputes as the parties will want to avoid the costs and potential uncertainty of Arbitration. Where settlement is not possible, at least now there is a procedure for resolution which either landlords or tenants can use if they feel the other party has not offered a compromise which is in in line with principles behind the Act or the New Code of Practice.