Q&A: How will the Commercial Rent (Coronavirus) Act work?

Following the enactment of the Commercial Rent (Coronavirus) Bill, James Hanham and Joseph Green answer a question on how its new binding arbitration scheme works Question I am the freehold owner of a commercial high street premises in England. I let the premises on a long lease to a national clothes retailer which is in financial difficulty. The tenant has consistently failed to pay rent during the pandemic and is currently in arrears in the sum of £200,000, which relates to the period December 2020 to date. It has blamed the impact of coronavirus on its business but has not provided me with any evidence and continues to operate from the premises. Does the Commercial Rent (Coronavirus) Act 2022 apply to these arrears and how does the binding arbitration scheme work? Answer The Act applies to arrears accrued during the period 21 March 2020 up to and including 18 July 2021 – if the tenant is able to show that it was “adversely affected by coronavirus” in that period. It will be able to do so if it was required to close some or all of the shop by reason of the imposition of lockdowns. As a clothes retailer, it seems likely that it would have been subject to a “closure requirement” or “specific coronavirus restriction” in the relevant period. The last day of the protected period is likely to be 12 April 2021 (the date on which non-essential retailers were able to re-open without restrictions). However, the Act would not apply if the shop was able to open and its trade was simply affected during the lockdown periods. The tenant (or you as landlord) is entitled to refer the matter to the arbitration scheme (the use of which is voluntary but the result of which is binding) and you are not entitled to take enforcement action in relation to the relevant arrears until 23 September 2022 (six months from the date that the Act received royal assent) or until the date on which any arbitration concludes. However, you will be able to take enforcement action in relation to any arrears that have accrued since 12 April 2021 (or probably earlier). Explanation The Act received royal assent on 24 March 2022 and legislates for an innovative solution to the financial difficulties suffered by the occupiers of commercial premises during the coronavirus emergency.  The Act ringfences rent owed and unpaid by business tenants (occupying under a tenancy to which Part II of the Landlord and Tenant Act 1954 applies), which fell due during the period ringfenced by the Act (the protected period), if the tenant is able to show that it was “adversely affected by coronavirus” by demonstrating that it was required to close all or part of the relevant premises under either section 45C of the Public Health (Control of Disease) Act 1945 or specific coronavirus regulations.  The protected period begins on 21 March 2020 and ends on or before 18 July 2021, depending on the closure requirements for that particular business. The end of the protected period is the last day the business was subject to a closure requirement. So, for a non-essential shop, the protected period is generally 21 March 2020 to 12 April 2021 (7 August 2021 in Wales) (the updated Code of Practice contains a useful table showing the timeline of the revocation of closure requirements in respect of each sector). The Act does not apply where the parties have already reached agreement in relation to the arrears.  The ringfenced arrears are defined by the Act as “protected rent debts” and would include amounts payable for occupation (whether described as rent or not), service charge (including that charged by the landlord for its insurance costs) and any interest falling due on arrears. It also includes any such debt satisfied by the landlord having drawn down from a rent deposit (although the debt will be treated as paid if the tenant thereafter made up the shortfall).  The Act introduces a moratorium on any form of enforcement action in respect of the protected rent debt (ie CRAR, forfeiture by re-entry, or petition for winding up), which also applies to any debt action claim made on or after 10 November 2021 and will last until 25 September 2022 (subject to any extension).  The arbitration process is subject to tight timescales which are set by the Act. Subject to modifications made by the Act, the Arbitration Act 1996 applies to the arbitration. To start the process, a reference is made to one of the approved arbitration bodies once one party has proposed arbitration to the other. The responding party must then provide a response to that proposal within 14 days (in default of which the matter may be referred at the end of the period of 28 days beginning with the date of the proposal).  The reference to arbitration must be accompanied by a proposal (with supporting evidence/written statements). Either party may apply to the arbitrator for an oral hearing (the default position is a resolution on the papers), which must take place within 14 days of that request being made. The award must be made within 14 days of the oral hearing (this may be quicker than an award on the papers, which the arbitrator is required to produce as soon as reasonably practicable, after the latest final proposal from either party is received).  In considering what relief to give to the tenant, the arbitrator is required to undertake a balancing exercise by reference to the principles set out in the Act and the “Statutory Guidance to Arbitrators”. On the one hand they must consider the extent to which any relief is likely to preserve the viability of the tenant’s business (if it would not, no relief is to be given) and on the other, the extent to which any relief is likely to imperil your solvency (considering the landlord’s balance sheet position).  In respect of “viability” and “solvency”, the arbitrator must be astute to ignore any manipulation of the appearance of the parties’ positions and is required to ignore the availability of any bank finance. James Hanham is a barrister at Landmark Chambers and Joseph Green is a solicitor in the real estate disputes team at Charles Russell Speechlys LLP