A guide to The Commercial Rent (Coronavirus) Bill

Posted Tuesday 26th April 2022

The Commercial Rent (Coronavirus) Bill has finally received Royal Assent and is now statute. It is called the Commercial Rent (Coronavirus) Act 2022 and came into force on 25 March 2022. It includes the arbitration scheme that deals with commercial rent arrears that remain unpaid and in dispute so long as they qualify as protected rent debts. “Protected rent” is any unpaid rent, service charge or insurance payment falling due within the period of 21 March 2020 to 18 July 2021 due to forced business closure. For a 6-month period, unless extended, a party to a business tenancy can refer to arbitration any protected rent debt and the arbitrator has power to grant relief from that debt, which includes writing off part or the whole of the debt, or deferring payment for up to a maximum of 24 months.

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The government has published guidance which aims to assist arbitrators who will be administering the scheme. This guidance aims to explains how the scheme will operate.

The Act confers upon the arbitrators unprecedented powers to effectively override the parties’ contractual lease obligations and arguably grants arbitrators the power to override Court rulings made in proceedings that were commenced after 10 November 2021. Instead, under the new arbitration scheme, the arbitrator will rely on the parties’ formal proposals and supporting evidence of their financial situation to make their award.

The guidance separates the scheme into 3 stages:

1. The Pre-Arbitration Stage

There are prerequisites that parties must comply with, such as informing the other party of their intention to make a referral to the arbitration scheme, waiting for the prescribed period to lapse, and then make a referral to an arbitration body from an approved list.

The scheme is not available to business tenants who have compromised their protected rent debt via a CVA, IVA, or other scheme of compromise or arrangement. However, the guidance does allow a business tenant to make a referral to the new arbitration scheme for protected rent debts if a CVA, IVA or other scheme of arrangement is pending.

The parties can agree on the number of arbitrators to form the tribunal with no limit on number. This will be an economic decision and, in the absence of express agreement between the parties, a single arbitrator will be appointed.

2. The Eligibility Stage

The arbitrator must determine whether a dispute is eligible for the new arbitration scheme bearing in mind the following:

If the tenancy is not a business tenancy, the arbitrator must dismiss the referral to the new arbitration scheme. A business tenancy is defined as “a tenancy to which Part 2 of the Landlord and Tenant Act 1954 applies. That is, a tenancy comprised of property which is or includes premises that are occupied by the tenant for business purposes, or business and other purposes”.
The new arbitration scheme applies to “protected rent debts”, which are debts for unpaid “rent” under a business tenancy which was “adversely affected by coronavirus”, and only insofar as that rent is be attributable to occupation during a “protected period”. Each of these terms also have prescribed meanings under the new arbitration scheme, and a referral to arbitration will only be eligible if all of the definitions are met.
To be eligible for the new arbitration scheme, the tenant’s business must be assessed by the arbitrator as presently viable, or capable of being viable with relief from payment of the protected rent debt. This is perhaps the most subjective, and yet important, definition in order to qualify for the new arbitration scheme. The guidance comments that “viability is deliberately not specifically defined, in order to take into account the vast array of different business models both within and between sector”. It states that “viable business models will differ from party to party and across sectors. For example, the arbitrator may wish to be mindful that profit margins can vary significantly between industries and sectors. The Act and this guidance therefore do not provide a set definition of viability. However, guidance is provided on a range of tools and processes that will be useful for arbitrators to consider in assessing viability at the appropriate time.” That guidance includes:
- Bank account information, the gross profit margin and/or net profit margin may be the most useful indicators as to whether the tenant’s business is viable;
- A consideration of the net profit margin or gross profit margin before March 2020 compared to the end of the protected period may be helpful to provide a clearer picture of viability;
- Smaller businesses may find it more challenging to provide predictions on their future profitability or may not have detailed financial records as compared to a larger business;
- Some businesses may not return to the same level of pre-COVID-19 profitability quickly;
- Where profit forecasting is provided, the arbitrator should consider the extent to which the future profit forecast is reliable, taking into account the context in which the business operates and whether current or expected market factors might make it difficult to predict future profitability;
- The balance sheet may appear to show that a business is able to meet their obligations, but it may not necessarily show that the business is profitable. Therefore, the gross profit margin and net profit margin are likely to be more informative as a measure of profitability in determining viability.

It is likely that the arbitrator will not have the requisite knowledge or experience of the tenant’s business or sector, and yet they will have to use the information provided by the tenant – notwithstanding that they can request further information they consider would be helpful – to make their decision on viability.

3. Resolving the matter of relief from payment

The arbitrator is then required to consider to what extent the tenant can pay a protected rent debt and balance that against the solvency of the landlord. The landlord does not have to provide evidence of its solvency unless relief from payment of the protected rent debt would threaten the landlord’s solvency. The arbitrator will ultimately have the difficult role of deciding which of either the tenant’s or the landlord’s proposals is most consistent with preserving the viability of the tenant’s business whilst also preserving the landlord’s solvency.

Awards from the new arbitration scheme will be made available to the public but confidential information will be excluded unless the parties consent to its inclusion. “Confidential information” includes information relating to either party or other persons which, if disclosed, would or may harm the legitimate business interests of that party or those persons. This could make it difficult for the arbitrator who must justify why a tenant’s business is not viable and set out its reasoning for doing so.

The guidance provides clear insight into how the new arbitration scheme is intended to function, and how the landlord and tenant can begin to make early preparations.

This article is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking or deciding not to take any action.