UPDATE: First announcement on the new COVID-19 rent arrears arbitration scheme

Yesterday (4 August 2021) the Government made its first announcement in respect of the soon to be implemented arbitration scheme for rent arrears accrued for tenants forced to close during the lockdown period due to COVID-19.

The legislation will ringfence rent debt for commercial tenants who have been affected by COVID-19 and introduce a system of binding arbitration in respect of such rent debt.

The announcement is low on detail but gives an indication as to what might be expected.  The key points from the announcement are:

  • Legislation will be introduced to ringfence rent debt accrued during the pandemic by businesses affected by enforced closures. Ringfenced rent debt is only that accrued from March 2020 by commercial tenants affected by COVID-19 business closures until restrictions for their sector are removed.
  • Legislation will set out a process of binding arbitration process to be undertaken between landlords and tenants.
  • Arbitration is expected to be used as a last resort, and only after negotiations have failed to achieve a resolution
  • Current commercial tenant protection measures (protection from eviction, restriction on the use of Commercial Rent Arrears Recovery, and restrictions against serving a winding up petition), will only apply to ringfenced arrears.
  • Ahead of the arbitration process being put in place, a revised Code of Practice will be published setting out the principles that parties and arbitrators are expected to adhere to, which will be reflected in legislation.

Aims of the legislation

The aim of the legislation is to balance protecting landlords and supporting those businesses most in need, to ensure that viable businesses can continue to operate and that debts accrued as a result of the pandemic can be quickly resolved to the mutual benefit of both parties. 

Where a tenant is unable to pay in full, then landlords and tenants should negotiate a resolution in good faith, using the principles set out in an updated Code of Practice.

The Government states that it expects terms to be agreed between landlords and tenants to defer or waive entirely an appropriate proportion of those rent arrears, that landlords should share the financial burden with tenants where they are able to do so and give tenants breathing space to agree new terms, but that tenants who can pay, should pay.

Where agreement cannot be reached, both the landlord and tenant will need to undertake binding arbitration.

The Arbitration

The aim is for an impartial and manageable process to be used only be used as a last resort when negotiations have failed.  It is expected that arbitration will provide a faster and easier resolution than through the courts.

Clear rules will be put in place to ensure impartiality and to manage the cost of the arbitration process for both landlords and tenants.

Landlords and tenants will be expected to share the costs of the arbitration if both are found to have negotiated in good faith, but arbitrators will be given the power to award costs to either party as part of their decision

Points to Note

Tenants paying any rent for the periods not affected by lockdown, must clearly state in writing what period of time that rent relates to and how it should be apportioned.  This will avoid it potentially being offset against the ‘ringfenced’ rent and falling outside of the tenant protection measures and the arbitration process.

The specific details on the new Code of Practice and the arbitration system are yet to be announced, and it is also unclear as to what happens with claims currently being processed by the court. If you would like to discuss how this announcement may affect you, please contact one of our Property Litigation team.

More information on the government announcement can be found here.

Who to contact

Leighton
Baldwin

Associate , Manchester

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