Arbitrating rent arrears

One of the defences raised to the arrears of rent claims in Bank of New York Mellon (International) Ltd v Cine-UK Ltd and other appeals [2021] EWHC 1013 (QB); [2021] PLSCS 80 was that – under the government code of practice with regard to commercial premises and leases, published on 19 June 2020 and subsequently updated on 6 April 2021, which had strongly encouraged landlords and tenants to communicate and negotiate ameliorative measures for tenants, including rent-free periods and moratoria – the claimant landlords should have been negotiating with their tenants rather than proceeding against them. This defence failed, as it should have done. As the master commented, the code was voluntary, and did not change the underlying legal relationship or lease contracts between landlord and tenant. The ministerial statement issued by the government in December 2020 did not suggest that the code was in any way binding. This was in contrast to the specific limitations in section 82 of the Coronavirus Act 2020 on various legal rights and remedies, such as forfeiture, which were otherwise generally available to landlords. There was no such limitation in relation to simply suing for rent (even if that might lead to enforcement by writ of control). The commercial rent moratorium preventing landlords using all the weapons in their legal armoury to enforce payment of rent was due to come to an end on 30 June 2021. On 16 June 2021, the government extended the moratorium until 25 March 2022. At the same time, in an apparent reaction to the fact that many landlords and tenants, particularly in the travel and hospitality sectors, had not found a way to compromise their differences over the treatment of arrears of rent (estimated by the British Retail Consortium in the case of retailers alone to amount to £2.9bn), the chief secretary to the Treasury announced that he planned to introduce legislation to promote the orderly resolution of debts resulting from the impact of the pandemic and the resulting lockdown on business. The shape of this legislation is not yet known, but it appears that it will work by imposing a requirement for parties to rental disputes to submit their disputes to arbitration where they cannot reach agreement. According to the government’s statement, the solution under the proposed legislation “could be done by waiving some of the total amount or agreeing a longer-term repayment plan”. The arbitration process will be delivered by private arbitrators who will have to go through an approval process to prove their impartiality, and who will act in accordance with guidelines which the government will set out in the legislation. Advance Australia Fair A clue to how this arbitration model might operate is provided by the government’s reference to “the successful Australian approach”. In Australia, the federal government brought in a mandatory code of conduct much earlier in the pandemic on 7 April 2020. This provides for landlords to offer their tenants proportionate reductions in rent payable in the form of waivers and deferrals of up to 100% of the rent ordinarily payable, on a case-by-case basis, based on the reduction in the tenant’s trade for the pandemic period and a subsequent recovery period. The waivers must constitute no less than 50% of the total reduction in rent, and may be greater where necessary to allow the tenant to fulfil its ongoing obligations; but regard must also be had to the landlord’s financial ability to provide such waivers. Deferred rent must be paid over the balance of the lease term, but if the balance of the lease term is less than 24 months, then the tenant may pay the deferred rent over a 24-month period, commencing after the end of the pandemic period. Landlords must not apply rent increases (except for retail leases based on turnover rent) during the pandemic period; and tenants will not be in breach of the lease if they reduce opening hours or cease to trade during the pandemic period. There is much more besides. If landlords and tenants cannot reach agreement, the matter may be referred by either party to applicable leasing dispute resolution processes for binding mediation. If the parties cannot reach agreement at mediation, there will be a right to escalate the matter through the relevant courts and tribunals. Alternatively, the “binding mediation” may take the form of an arbitration where the arbitrator determines the resolution without a further escalation regime. Each state and territory in Australia has implemented its own version of this code. In New South Wales, for example the Retail and Other Commercial Leases (Covid-19) Regulation 2020 applied the arbitration provisions in the Retail Leases Act 1994 to any dispute concerning rent arrears (among others). That Act allows for disputes arising in relation to leases to which it applies (most shorter leases of smaller premises) to be determined by the Civil and Administrative Tribunal (similar in some respects to our First-tier Tribunal). History in the making In this country, we have never had a mandatory statutory dispute resolution procedure for commercial leases. By and large, apart from rent review disputes (which are nearly always referred to arbitration in accordance with specific provision in the lease), and some agricultural tenancy disputes, arguments between landlord and tenant are litigated without recourse to arbitration. If our government’s proposal is enshrined in legislation, this will be a major change in the way in which landlord and tenant disputes are resolved, and could be the harbinger of more wide-ranging legislative intervention. It will be interesting to watch the progress of this legislation in parliament. Landlords will urge on the government the need to respect their vested interests, and not to penalise their shareholders and funds while some well-heeled tenants are allowed to play the system to their advantage. For its part, the government will be concerned to protect the small businesses and jobs that support a large part of the economy. Interesting times indeed. Guy Fetherstonhaugh QC and Kavish Shah are barristers at Falcon Chambers