Pandemic rent arrears: don’t drink in the ‘last-chance saloon’

Gerard Tomnay offers six reasons why it’s better to mediate than arbitrate your pandemic rent arrears. By its own admission, the government’s Commercial Rent (Coronavirus) Bill is a last resort for commercial landlords and tenants to settle certain ring-fenced, Covid-related rent arrears (being those due under tenancies of business premises adversely affected by coronavirus and which were required to close from 21 March 2020 to 18 July 2021 (in England) or 7 August 2021 (in Wales)) before the extended moratoriums on landlord enforcement end. It creates a new binding arbitration process to settle the in-scope arrears and is expected to become law in March this year. The accompanying Code of Practice (published 9 November 2021) encourages parties to settle all Covid-related arrears (even if not in scope) and use the new arbitration process for the in-scope ones only when they are unable to reach agreement. It recommends using a neutral third-party mediator to help the parties settle when negotiations fail or stall but it’s felt that a settlement could still be achieved. The arbitration process is the “last-chance saloon” for in-scope tenants, because the enforcement protection expires six months after the Bill is enacted, or, if a debt is referred to arbitration, when that arbitration ends. “Out-of-scope” tenants have even less time, as the current restrictions end sooner. So enforcement looms. Landlords also need to decide if they can wait that long and if their tenants will be worth suing by then, especially as other creditors who are not subject to the restrictions may already have put them into an insolvency process. There are several reasons that it is better to mediate these disputes than use the Bill’s arbitration system (with the caveat that you should always consider each case on its own merits, with professional advice where necessary). How many are left and what’s the problem? According to the Bill’s “impact assessment” dated 8 November 2021, there could be Covid-related arrears of around £1.5bn left by March 2022 in England and Wales, of which £400m is estimated to be in scope, relating to 50,000 businesses. Whether or not in scope, these remaining disputes are the stubborn and sticky outliers where presumably trust issues or historical grievances (or sheer bloody-mindedness) are preventing settlement, for example: the “can pay/won’t pay” tenants who think they can “milk the moratorium”; the landlords who (rightly or wrongly) refuse to believe that tenants can’t afford to pay; the tenants who are calling the landlord’s bluff and gambling that they won’t forfeit when restrictions end; the landlords who prefer to wait for the restrictions to end before going in with all guns blazing; the tenants who are (or whose landlords think they are) pulling the wool over the landlord’s eyes; the tenants who refuse to engage with their landlords (and vice versa); the parties who just don’t trust each other or are unable to work together. Or maybe it is simply because they don’t know enough about the benefits of mediation, so haven’t yet thought to use it to help them see what a settlement could look like? Mediation is highly successful, with a 93% success rate on – or shortly after – the mediation day, according to the Centre for Effective Dispute Resolution’s ninth Mediation Audit in 2021. However, the majority of respondents to the government’s Call for Evidence on Commercial Rents (updated 4 August 2021) claimed never to have mediated because they didn’t think it would resolve anything – which is a bit like saying you have never tried something because you don’t like it. Why mediation works Mediation gives participants a confidential and safe space to focus on the solution, not the fight. It’s not about who is right or wrong, but about being better off.  Mediators can often, in confidence, uncover hidden agendas and overlapping interests and find a sweet spot on which participants can build a settlement. Parties will often tell the mediator in private things they would never tell the other side. It works because: participants explore their mutual interests instead of being positional; the mediator keeps things on track, focusing on what’s important to each participant; there is no obligation to agree anything; and participants retain control over the outcome, so they are more likely to follow through on any settlement agreement. Lawyers are usually present or contactable during the mediation, which can help participants “reality test” their current positions to see if a mediated settlement beats the best/worst-case alternatives. Why it is better to mediate than arbitrate the arrears Mediation has these six advantages over the Bill’s arbitration process in its current form (it is progressing through parliament, so may change): 1. Wider scope – the arbitrator must establish if the referral is in scope and assess the viability of the tenant’s business and decide (using the “principles” in the Bill) if preserving and/or restoring it by granting relief based on the parties’ proposals would be at the expense of the landlord’s solvency (in which case the landlord’s solvency seems to prevail). That encourages landlords to attack eligibility rather than focus on the proposed settlement terms. The arbitrator cannot factor in any other leasing issues in the wider relationship between the parties. Mediation, on the other hand, can include other issues, such as re-gearing the lease, pre-agreeing upcoming rent reviews, removing break clauses, extending the length of the lease, varying the lease terms, etc. Mediation allows participants to decide whatever they want (subject to the overarching law and as long as it’s legal). 2. Greater confidentiality – the Bill creates these confidentiality concerns: (a) the arbitrator must publish its award, giving reasons (but excluding any commercially sensitive information which could cause significant harm, unless the party it relates to consents); and (b) of greater concern to parties worried about confidentiality is the requirement for the arbitrator to hold a public oral hearing if one of the parties insists. One can easily imagine a party using this as a form of gamesmanship to bring the other party’s commercially sensitive information into the public domain (it will pre-date an award, so can’t be excluded) with all the ensuing press coverage and competitor scrutiny that would inevitably follow (especially by a competitor seeking evidence for use in its own arbitration against one of those parties). Mediation is totally confidential, so that could not happen. 3. Consolidation – the Bill envisages a separate arbitration for each lease. So parties under multiple leases with each other may struggle to consolidate them under one hearing because, even though the Bill modifies the Arbitration Act 1996 to make it possible, it’s unclear how it could happen in practice. If dealt with separately, the awards (although published) aren’t binding on other arbitrators, so there are likely to be different outcomes on similar facts. Mediation allows consolidation, so can cover the entire portfolio with one outcome. 4. Longer repayment options – the maximum repayment period under an arbitration award is 24 months. Mediation allows participants to agree longer repayment options. 5. Restriction-free – the Bill does not stop repayment agreements (whether for in-scope or out-of-scope arrears, or made before or after the Bill is enacted) from having effect or being enforced. The moratoriums do not apply to them, so they are legally binding and can be enforced. 6. It’s your decision – if you don’t like the arbitrator’s award, the grounds of appeal are extremely limited and it is highly unlikely you will be able to challenge it at court if the arbitrator has done its job properly. Decisions reached in mediation, however, are made by the participants themselves. The mediator does not advise or (with certain limited exceptions) make recommendations or decisions or impose solutions, so a settlement will always be a “good enough” negotiated agreement which the participants are happy to live with. If no settlement is reached, participants can still pursue their claims in court without being prejudiced by anything said or disclosed in mediation. That is not possible under the Bill’s arbitration process, because the award is binding. Conclusion Mediation is a much better way of settling the remaining problematic Covid arrears than the Bill’s arbitration system. Mediators include former real estate solicitors, barristers and surveyors who mediate full-time, and there are those still in practice who do both, so it should not be difficult to find one. They have been on both sides of the fence, so understand the problems and can ask the right questions to see what lies behind them, helping disputants to see things differently and achieve their commercial objectives. Of course, there is no guarantee mediation will always produce a settlement because mediators cannot force participants to agree anything, but it is still a worthwhile process. And it’s usually much quicker and cheaper than any other form of dispute resolution. Just think what you could accomplish if you could stop worrying about your Covid arrears and focus on something you would much rather be doing. Gerard Tomnay is a mediator at The Property Mediation Centre  Photo © Fer Gregory/Shutterstock