New Arbitration scheme to resolve Covid arrears in England and Wales
What does the bill do?
As part of the Government’s efforts to mitigate the impact of Covid-19, it has introduced a new Code of Practice for recovering arrears accrued during the pandemic. The Code sets out how it expects landlords and tenants to seek to resolve disagreements over arrears that built up during Covid.
In addition, the Government has initiated a bill which seeks to introduce a binding arbitration process for those arrears which have built up during the pandemic. This includes the possibility of arrears being waived or deferred by the arbitrator.
The proposed bill is only in draft form and is subject to change as it makes its way through Parliament. However, the draft seeks to provide a framework for resolving disputes over Covid arrears, with the possibility of tenants being given time to pay or even a waiver of some or all of the arrears.
Which tenancies does this apply to?
The current proposal applies to tenants in England & Wales who have or had a Business Tenancy (governed by the Landlord and Tenant Act 1954), who required to close all or part of their premises due to Covid regulations (including those in the hospitality sector who could perhaps trade but on a reduced basis, or were impacted by social distancing measures).
The arrears must have accrued during the “Protected Period” from 21 March 2020 until the earlier of (a) 18 July 2021 (England), 7 August 2021 (Wales) or (b) the last date the tenant’s business was subject to the restrictions.
The arrears can include rent, service charge and insurance premiums.
What is the proposed process?
The devil is always in the detail and the process may well change. It appears that there will be a moratorium which prevents landlords from taking action against tenants (providing tenants with added protection from being pursued for arrears through the courts, in addition to the existing protection from forfeiture).
Landlords and tenants are being encouraged to reach amicable agreements in relation to the arrears. But if that is not possible, landlords will not be able to go to court. The dispute must be resolved by arbitration. The arbitration bodies who will appoint the arbitrators have still to be confirmed and approved by the Government.
The bill proposes to be retroactive in that a tenant may be able to ‘stay’ (i.e. place on hold) any proceedings issued from 10 November 2021 to allow for the arbitration process to take place.
In the arbitration process, the parties will be able to put forward their arguments and supporting evidence. If a party requests a hearing, then one will take place but otherwise the arbitrator will base their decision on the written cases.
What can the arbitrator decide and what do they consider?
The arbitrator is able to write-off the arrears, or defer the payment of arrears for 24 months. The arbitrator has to adopt the principles set out in the legislation, which include:
- that any award should be aimed at preserving or restoring the viability of the tenant’s business, so far as that is consistent with preserving the landlord’s solvency; and
- that the tenant should, so far as is consistent with the prior principle, be required to meet its obligations as regard the payment of protected rent in full and without delay.
In assessing the viability of the tenant’s business the arbitrator must consider:
- the assets and liabilities of the tenant, including any other tenancies to which the tenant is a party,
- the previous rental payments made under the business tenancy from the tenant to the landlord,
- the impact of coronavirus on the business of the tenant, and
- any other information relating to the financial position of the tenant that the arbitrator considers appropriate.
In assessing the solvency of the landlord the arbitrator must consider:
- the assets and liabilities of the landlord, including any other tenancies to which the landlord is a party, and
- any other information relating to the financial position of the landlord that the arbitrator considers appropriate.
In looking at the viability of the tenant’s business or the solvency of the landlord, the arbitrator must disregard the possibility of the tenant or the landlord borrowing money or restructuring its business. The Code of Practice provides further guidance on the factors the arbitrator should take into account.
What does this mean for you?
A waiver of arrears or deferred payment could have a significant impact on the cash flow of both landlords and tenants. Tenants will welcome this as they feel they have felt the brunt of the Covid restrictions. However landlords have also felt aggrieved as they have not received the same level of support as tenants have during the pandemic.
Whether you are a landlord or a tenant, this proposed bill will likely affect you if you have a business tenancy which has Covid related arrears. Seeking to resolve matters amicably through the Code of Practice will always be the preference, and we can help assist with that process. However, should that not prove possible, a mandatory arbitration process may be likely, which our Real Estate Disputes team can help you navigate. Do get in touch if you require advice or guidance on your own situation.
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