Arbitrating rent arrears – or perhaps not

In our last article, we considered how the government’s proposed binding arbitration to settle Covid-19 commercial rent disputes might work. This, it will be recalled, is to be based on what the chief secretary to the Treasury described on 16 June 2021 as “the successful Australian approach”. He went on to characterise this as “striking the right balance”. But is there, in fact, any such thing? And, if it is appropriate to speak in terms of striking a balance where contractual rights and obligations are concerned, will it do so? The Australian approach To recap: in Australia, the federal government brought in a mandatory code of conduct in April 2020, providing for landlords and tenants to be able to refer disputes concerning the appropriate rental liability alleviation either to mediation – and, failing that, to adjudication through the relevant courts and tribunals; or to arbitration. The English approach According to the government, which appears to think that the Australian approach is working well and is capable of application in this jurisdiction, 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 is intended to 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 to be set out in the legislation. Dependence on the experience in Australia may, however, be wishful thinking – and here we are indebted to our Australian colleague the Hon Dr Clyde Croft AM SC (recently appointed a Reserve Judge of the Supreme Court of Victoria) both for the penetrating analysis in his article “Covid-19 and Emergency Regulations” in the Australian Law Journal ((2021) 95 ALJ 98) and for his further views expressed over the airwaves. In brief, Clyde makes the point that the Australian states and territories vary considerably in the extent to which the dispute resolution framework has been put into effect. Clyde sagely remarks of the new legislative frameworks: “Their utility or effect in providing real and substantive remedies can only be assessed by careful consideration of their provisions.” And the detailed survey he carries out, comparing Victoria with Western Australia, shows that, as drafted, most of the provisions in the former do not lend themselves to substantive, determinative, relief. The drafting is aspirational, lacking actionable remedies. Our sense (although Australian constitutional lawyers will put us right) is that the states and territories have largely treated the so-called mandatory code as a series of guidelines rather than a requirement (and, indeed, had it really been mandatory, it might well have been unconstitutional). Drafting problems This jurisdiction does not have to trouble with federal issues of this sort – but it will be instructive for it to consider the sorts of detailed drafting issues that arise in the implementation of the various state solutions. A working example is provided by the decision on 15 June 2021 of the Western Australia State Administrative Tribunal in Van der Feltz v Rispoli [2021] WASAT 84. A tenant of commercial premises applied to the tribunal under the Commercial Tenancies (Covid-19 Response) Act 2020 (WA) for rent relief from their landlord at a rate of 46.62% for the whole of the first pandemic emergency period (from 30 March to 29 September 2020), based on the decline in turnover they claimed to have experienced for July 2020. The tribunal allowed a reduction in the claim, but only after a searching examination of the alleged decline. In so doing, it had to pose and answer a series of difficult questions that arose: Was the tenant’s lease one to which the Act applied? Who bore the burden of proof? Was the fact that the tenant had in fact paid the rent material? What level of detail was required to prove a decline in turnover? To what extent was it necessary to show that the decline was attributable to the emergency, as opposed to other factors? If the tenant’s post-emergency turnover comfortably exceeded expectations, should that be taken into account, and if so, how? How should the parties’ respective financial capacities be balanced? Perhaps the most difficult matter confronting the tribunal was how to give effect to the legislative direction to apply principles of proportionality and fairness in making its determination of the appropriate reduction to award. Ultimately, the tribunal decided that it would be unfair to require the landlord to pay rent relief which exceeded the decline in turnover actually suffered by its tenants over the relevant period – but in other cases, the answer will not be quite so obvious. Our government will face similar difficulties in drawing the proposed legislation in a way that makes it clear and easy to implement. It would do well to study the decisions emerging from Australia before finalising its drafting – if indeed it decides that it would be appropriate to proceed in the first place. Human rights Another matter the government will have to consider is the protection of property rights under Article 1 of the First Protocol of the European Convention on Human Rights. A landlord’s entitlement to arrears of rent comprises a fundamental contractual right to which there is no obvious defence. Such rights can be overridden in pursuit of the public interest, provided that there is a reasonable relationship and proportionality between the means of overriding and the aim sought to be realised. There is a margin of appreciation given to national governments in this respect. It may, however, be said to be questionable whether it is a legitimate use of legislative diktat to override vested property rights in this way. Presumably landlords who value their tenants will strive to arrive at a compromise that reflects their desire to enable the tenants to stay in occupation. Landlords who wish to be rid of their tenants are likely to object to the imposition of a compromise that allows those tenants to stay in possession. Guy Fetherstonhaugh QC and Adam Rosenthal QC are barristers at Falcon Chambers Photo by Design Pics Inc/REX/Shutterstock