The British Property Federation (“BPF”) estimated that by 30 June 2021, £7.5 billion of commercial rent was in arrears. Whilst some agreements between landlords and tenants have been reached since then, further arrears have also arisen and latest estimates by the BPF are that 20% of Covid related rent arrears remain unpaid.
Tenants are currently protected by the existing Covid moratorium that prevent landlords from either evicting commercial tenants, or using winding up petitions, for arrears of rent in the period March 2020 to September 2021.
What is changing?
On 9 November 2021, the government publicised a revised code of conduct for commercial property relationships, alongside a draft legal bill expected to become law on 25 March 2022.
The government guidance was that tenants that are able to pay rent debts for any periods, should do so, regardless of the impact of Covid. Tenants that are unable to pay rent debts should seek to negotiate with their landlord with the expectation of burden sharing.
This guidance was intended for the period up to 25 March 2022, and the reality is that many tenants have not addressed the arrears and landlords have been unable to exert any pressure.
The Arbitration Process
If agreement between the landlord and tenant has not been reached then the government arbitration process kicks in.
Draft statutory guidance was published on 23 February 2022;
Whilst still in draft stage the principles appear to be good news for tenants and bad news for landlords.
- The qualifications of the arbitrators are unknown and the government is inviting applications now;
- The arbitrator will assess whether the tenants business is viable or would become viable if given relief from payment;
- The arbitrator will also consider the landlords solvency in order to determine how much the tenant can afford to pay and how quickly, to preserve the tenants viability whilst preserving the landlords solvency.
The implication therefore is that if the landlord does not have solvency issues then the emphasis is on reaching an accommodation which will preserve the business of the tenant.
In addition the arbitrator must disregard the possibility of either of the parties borrowing money or restructuring their business. Rather bizarrely the guidelines state that if a business or landlord took on more debt to come viable or solvent for the purposes of arbitration under the Act, they would likely be delaying the problem and risking their long term viability or solvency. This rather contradicts the governments strategy throughout the pandemic of HMRC support, landlord suppression and government backed loans, however again good news for tenants.
Any award made by the arbitration is final and binding however either party may apply to Court within 28 days.
As a firm we have made the decision not to apply to be an approved arbitration body. Whilst we firmly believe that the skillset is not property related and would be best performed by Corporate Recovery personnel, we have clients who are engaging us in preparation for arbitration to present their case regarding viability and affordability. We recognise the cashflow issues in hand and have tailored a viability and affordability review at a cost in most cases of between £3-5,000 plus VAT. The KRE report will be used to support the party’s proposals for settlement to the arbitrator.
If you have any queries regarding this eshot please do not hesitate to contact Paul Ellison in the first instance and he would be happy to try to help.
Paul Ellison – 07967471211
Rob Keyes – 07500933022
David Taylor – 07855231103
Gareth Roberts – 07979706392