- Commercial rent arrears continue to accumulate as a result of the pandemic, such that arrears are estimated to reach £9 billion by March 2022 and comprise a much larger slice of the typical debt stack than they did pre-pandemic.
- The UK government has proposed a binding arbitration scheme to help resolve the arrears and further extend the existing protections from enforcement and insolvency procedures that commercial tenants enjoy.
- Both commercial landlords and tenants should consider the options these proposals raise, including negotiating a settlement or a more holistic debt restructure.
The arbitration procedure
On November 9, 2021, the UK government introduced the draft Commercial Rent (Coronavirus) Bill (the Bill) that sets out how the arbitration procedure will work, which is broadly as follows:
- It will be available to both landlords and tenants that have been unable to reach an agreement on unpaid “protected” rent that fell due during the “protected period.”
- In England, this means the period between 21 March 2020 and 18 July 2021, during which the whole or part of the business or premises were subject to a closure or restriction requirement (taking into account the difference in requirements between different business sectors).
- Parties wishing to make use of the procedure must refer the matter to arbitration within six months of the Bill becoming law (it is expected to become law at the end of March 2022).
- During this period, landlords will be unable to forfeit the lease, use commercial rent arrears recovery, or bring a debt claim to recover the protected debt. Currently, debt claims can still be issued, but once the Bill is passed, a party can apply to stay such proceedings if they commenced on or after November 10, 2021.
- Arbitration cannot be used where the tenant is already subject to a company voluntary arrangement, scheme of arrangement, or restructuring plan. Arbitration will also be unavailable for tenants that are not viable and would not become viable even with the arbitrator’s intervention.
After considering the proposals submitted by the parties, the arbitrator will make an award guided by the following principles:
- The award should preserve (or restore and preserve) the viability of the tenant’s business, so far as is consistent with preserving the landlord’s solvency.
- The tenant should pay its debt in full and without delay, so far as is consistent with the first principle.
While these principles are helpful, the assessment of whether a business is viable and solvent will likely mean that parties incur significant legal and expert costs as part of their submissions.