Update on the Commercial Rent (Coronavirus) Act 2022 (the “Act”)

The draft Bill passed its third reading in the House of Lords on Tuesday, with the House of Commons due to consider the final (clarificatory) amendment in session on 23 March 2022.

Accordingly, the Act will almost certainly be in force at the end of next week.

Much has been written about the intricacies of the Act, which both the legal community and property sector have followed with interest. However, the Government’s intention with the Act was to effect a straightforward process of ringfencing and resolving certain pandemic arrears. We explore below the key points to bear in mind when the unprecedented two year moratorium against forfeiture is lifted next week.

Whilst there are many questions to be resolved as to how the Act will work in practice, the overarching approach has been kept simple:

• if a tenant was subject to compulsory closure, then arrears accruing during that period of restrictions are protected
• if a tenant was not subject to any compulsory closures, e.g. essential retailers, among others, the Act plays no part in resolving any outstanding arrears

The “protection” for tenants is a six month window within which to ask an arbitrator to:

1. look at the tenant’s business and decide upon gateway questions of viability, affordability and landlord solvency (the “arbitrator’s principles”):

• if the tenant can afford to pay, it must pay
• if the tenant’s business is not ultimately viable, it is not eligible
• if an award would make the landlord insolvent, it should not be made

and, if those tests are met, then

• make an award based on the following scenarios:
• full or partial write off
• deferral of the debt on terms for up to 24 months
• nil concession

The arbitrator is essentially faced with a “pendulum style” decision making process, e.g. if the tenant makes a proposal that is consistent with the “arbitrator’s principles” and the landlord’s proposal is not consistent, the arbitrator is obliged to make an award based on the tenant’s proposal. If both parties make consistent proposals, the arbitrator will choose the one that is most consistent with the arbitrator’s principles. If no consistent proposal is made, then (and only then) does the Arbitrator need to make a determination on the evidence in accordance with the arbitrator’s principles.

The Government’s impact assessment estimates that c.7,500 cases will go to arbitration and that c.1,200 arbitrators will be required to facilitate this.

Some key questions:

Who will the arbitrator be and who pays their fee?

There is still a lack of clarity as to who the arbitrators are likely to be. They will need financial analysis skills so may be accountants, although they may also need to engage legal advice to assist with application of the Act. Application of the arbitrator’s principles – questions of affordability and viability – are not straightforward and little guidance has been given.

The tenant, as the likely applicant, must pay the arbitrator’s fee upfront. The fee is then split between the parties at the end, unless one party has behaved unreasonably, in which case the arbitrator has a discretion to deal with the matter of his or her fees, but importantly has no wider power to deal with costs in the arbitration generally.

What is the position for tenants with multiple premises; how does the Act deal with that in terms of the arbitration process?

Unfortunately, in short, it doesn’t. There may be an opportunity to consolidate arbitration proceedings, but that would require the agreement of all relevant parties.

How do I work out the extent of a tenant’s “protected rent debt”?

Firstly, it is not just annual rent that is protected. Protection extends to service charge, insurance, VAT, interest and rent deposit top-ups.

Secondly, the protected rent debt is worked out by reference to a protected period. Broadly, the protected period will be from 21 March 2020 until the last day the tenant faced restrictions.

The Code contains a useful table which can be used to work out the last day of the protected period depending on the relevant sector:

Further questions will emerge as the Act comes into force and the theory of the “binding arbitration scheme” is put into practice. Join us for our webinar on 29 March 2022 “Returning to the new normal - Commercial Rent (Coronavirus) Act 2022” when we discuss the Act and its implications – register here.