Arbitration to unlock rent arrears needs clarity

Jason Martin, a property expert from Leonard Curtis Property Solutions in Leeds, talks about the Government’s forthcoming Bill to tackle ring-fenced rent debt and advises on complexities that might arise, especially for larger tenants and landlords.

“In the weeks since the Government published its draft legislation for tackling accrued rent arrears for businesses who were forced to close during the pandemic, one of the most discussed aspects of the Bill has been how will the proposed arbitration process to decide what happens to the ringfenced rent debt work in practice, especially for larger tenants and landlords.

“To recap, the Commercial Rent (Coronavirus) Bill – due to be passed in March 2022 – introduces a binding arbitration process for qualifying businesses who have not been able to reach agreement with their landlords.

“For a period of six months after the Bill is passed, a tenant or landlord can make reference to arbitration and must submit a proposal for resolving payment of the arrears. The counterparty will have 14 days to submit its own proposal.

“The arbitrator must then assess the viability of the tenant’s business. If the arbitrator determines that the business (a) is not viable, and (b) would not be viable even if the tenant were to be given relief from payment of any kind, they must dismiss the reference.

“In making their decision, the arbitrator must have regard to certain factors. These include the tenant’s assets and liabilities, any other tenancies the tenant may have, and any financial information the arbitrator considers appropriate. No regard may be had to the possibility of the tenant (or the landlord) borrowing money or restructuring its business.

“If the arbitrator concludes that the tenant’s business is viable, they must make an award which accords with certain principles detailed in the Bill, namely:

• an award should be aimed at preserving or restoring the business of a tenant, while preserving the solvency of the landlord; and
• so far as is consistent with that, the tenant should be required to meet its obligations without delay.

“An award may reduce the rent debt or give the tenant extra time to pay (up to a maximum of 24 months).

Need for further clarity

“Whilst this appears to be a constructive step to deal with this rent debt problem, there are a number of areas which tenant and landlords will be keen to see further clarity on given the arbitrator will have a very wide discretion in determining disputes.

“In particular, how will an arbitrator assess what the tenant can afford to pay and how much the landlord can afford to have written off?

“What information will an arbitrator expect to be provided by a tenant to support their proposal? Will this be dependent on the sophistication of the business? Will a bigger business be expected to provide a comprehensive financial pack to support their proposal? What guidance will an arbitrator be given if a landlord refuses to provide detailed financial information citing commercial confidentiality reasons?

“If a landlord has several tenants that could potentially seek arbitration, how does that affect the arbitrator’s assessment of the effect any award might have on the landlord’s future solvency?

A complex process

“Finally, are there sufficient arbitrators out there with the necessary skills to resolve the disputes willing to work at Government fee rates? Some cases are likely to involve complex businesses and could require specific financial expertise.

“The Government’s intention is to put in place a straightforward method to resolve the situation, but in practice an arbitrator’s assessment is likely to become a complex process.

“For anyone looking to use the arbitration process legal input will probably be required, along with other professional advice for the more complicated cases. This adds a further layer of expense in conjunction to the arbitration fees and management time incurred.

“One consequence could be that these costs encourage both landlords and tenants to enter into positive negotiations to avoid referral to arbitration.

“The objective of the Bill and the accompanying revised Code of Practice is certainly a welcome step but as ever the devil will be in the detail. The Government has set itself a relatively short deadline to get the Bill through Parliament and it is hoped that it receives sufficient scrutiny to ensure it balances the needs of both landlords and tenants.”