The Code of Practice as the Arbitration Scheme Comes to a Close
Key Contact: Jennifer Butcher
Author: Harriet Kennerley & Katie Hardie
The Covid pandemic resulted in exceptional challenges for both landlords and tenants – the commercial property sector was most acutely felt in retail and hospitality who endured several rounds of government imposed closures from March 2020. To try and protect businesses from insolvency and other issues during this period, the Government introduced a series of measures to protect tenants and the outcome of these are explored in this article and others published on our website.
The Commercial Rent (Coronavirus) Bill and new Code of Practice
The Commercial Rent (Coronavirus) Bill 2021-22 (“the Bill”) passed through Parliament receiving Royal Assent on 24 March 2022. The Bill covers any business tenancy to which Part 2 of the Landlord and Tenant Act 1954 applies (including a “contracted out” lease).
The Code of Practice for commercial property relationships was issued on 9 November 2021 (“the Code”) and replaced the existing Code of Practice first issued on 19 June 2020 following the COVID-19 pandemic.
Aim of the Bill and Code
As explained in our previous article published on 24 March 2022, the purpose of the Bill is to resolve claims for rent arrears that have accrued during periods of enforced closure because of the COVID-19 pandemic by introducing a binding Arbitration process if landlords and tenants have not been able to reach agreement.
When the Bill came into practice, it replaced existing restrictions with a new moratorium that prevents landlords from exercising their usual remedies around evicting tenants who are unable to pay rent, stopping landlords unnecessarily seizing goods owned by the tenant in lieu of rent and stopping businesses in rent arrears from being made insolvent by landlords. This has applied while the application period for Arbitration is open (six months from the passing of the Bill, until 24 September 2022) or while statutory arbitration is in progress. The Bill applies strictly only in respect of certain ringfenced rent arrears, service charges and interest which accrued during and as a result of the periods of forced closure of businesses, which were affected at least in part due to COVID-19 restrictions.
The Code is supplemental to the Bill but applies to all commercial rent arrears and not only those protected debts that will fall within the scope of the new Arbitration scheme. The Code has provided clarity for both tenants and landlords, encouraging them to work together on resolving unpaid rent. From the outset of the code’s publication, the Government said that they would continue listening to voices from across the sector on how we could shield businesses from the worst economic shocks this virus has wrought and it was hoped that cases could be resolved. A further call for evidence over the spring reflected that in a minority of cases, some landlords and tenants have been unable to resolve their disputes over rent arrears. Overall it has seen to be a successful scheme.
Landlords and tenants should attempt to settle their disputes by negotiation in the first instance. If landlords and tenants are unable agree as to payment of the ring-fenced debt, the Bill provides for either party to refer the matter to a binding Arbitration scheme (under Part 2 of the Bill). It also provides for the suspension of other remedies and methods of enforcement in respect of the affected debt, including forfeiture, until such time as the arbitration is concluded (under Part 3 of the Bill). The Code of Practice (supplementing the Bill) provides guidance as to negotiations and settlement prior to Arbitration, which should remain a last resort, and is not itself binding. Failing agreement by this means, the dispute can then be referred to Arbitration. The overriding objective of the Bill and the Code is to preserve otherwise viable businesses and the jobs that they support.
For an in depth summary of the key points covered in our previous article around the Code and the Bill, including detail around what rent payments are covered and the Arbitration process, please see the article here: https://acuitylaw.com/the-commercial-rent-coronavirus-bill-and-new-code-of-practice/
End of the Arbitration period
The six-month period for Arbitration set out in the Bill is fast approaching – this will end on 24 September 2022. There is now only a short window left to make any referrals to an arbitrator, unless a decision is made to extend the current deadline. As a reminder for the Arbitration process, these are the steps to be followed:
- Either the Landlord or tenant will notify the other of their intention to arbitrate. The other party will have 14 days in which to respond.
- If a response is received, the party instigating the process has 14 days to consider the response and reply, failing which either party can refer the matter to arbitration. If no response is received, either party can refer the matter to arbitration after 28 days of the initial notification.
- The referring party must advance a settlement-proposal with supporting evidence and the other party can then make a counter proposal within 14 days (also accompanied by supporting evidence).
- The parties can make a revised settlement proposal within 28 days of their original proposal.
- If no agreement can be reached, providing the matter qualifies for arbitration and satisfies the requirements as above, the arbitrator will accept the referral and make an award.
- The landlord and tenant can request for an oral hearing (heard in public) and the arbitrator will make an award within 14 days of the hearing.
Getting in contact with Acuity
If you are a landlord or tenant dealing with any covid commercial rent arrears dispute or if you want to discuss the points raised in this article, please contact our Property Litigation Team and we will be happy to help.