The British Property Federation estimated that by 30 June 2021, commercial rent arrears in the UK totalled £7.5 billion. As a result of the lockdowns in 2020-2021, non-essential retail was closed for longer than it was open and, in June 2020, the Government published a voluntary Code of Practice to encourage commercial landlords and tenants to work together to negotiate the amount of rent that should be paid for the periods when the UK was in lockdown.
The Code of Practice was not binding and, in order to provide a longer-term solution, the Government has now proposed legislation to ringfence commercial rent arrears that have accrued since March 2020 and to introduce a system of arbitration to decide how much of the debt should be paid by a defaulting tenant.
The intention is for the new arbitration process to come into force from 25 March 2022 and although legislation hasn’t yet been passed it is likely to have the following features:
- The landlord and tenant will have 6 months from the date when the legislation takes effect to request arbitration
- Existing moratoriums against forfeiture or using Commercial Rent Arrears Recovery will remain in place until at least 25 March 2022 and, after this date, remedies are only likely to available in respect of rent arrears that accrued other than during the lockdowns or if neither party has requested arbitration within 6 months of legislation taking effect
- Existing court proceedings to recover commercial rent arrears could be stayed if either party requests arbitration
- If the landlord and tenant cannot reach an agreement about arrears accrued during the lockdowns, then either party could request arbitration even if court proceedings haven’t been issued
- If the landlord deducts any sums from the rent deposit, the amount of the deductions will also be subject to determination using the arbitration scheme
- The arbitration process will be delivered by private operators using guidelines to be set out in the legislation.
The introduction of the arbitration scheme represents a very substantial intervention in the landlord and tenant relationship and arbitrators are likely to have discretion to reduce the amount of the rent based upon factors such the viability of the tenant’s business and the landlord’s solvency which will potentially require detailed scrutiny of each party’s accounts.
The arbitration scheme should bring an end to the most intractable rent arrears disputes but trying to balance the competing commercial interests of landlords and tenants will be difficult especially if the arbitrator is face with competing and exaggerated claims about each party’s financial position.
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