On 9 November 2021, the government introduced The Commercial Rent (Coronavirus) Bill to parliament with the intention of establishing a legally binding arbitration process for commercial landlords and tenants who have not already reached an agreement to sit outside the court process.
On the face of it, the arbitration scheme appears a commercially sensible approach to solving a significant problem. If both tenant and landlord comply with the new code of practice, it is to be hoped that most rental positions can be resolved by agreement. The arbitration process also has different proposal stages, which may be designed to facilitate agreements without the arbitrator having to actually determine the rent.
With the focus of arbitration awards being viability of the tenant, this may lead to some low awards. The landlord’s solvency is supposed to be considered; however, if the tenant cannot pay any sum, the landlord will not recover anything and end up in a worse position.
From a tenant’s perspective, other than potential liability for the landlord’s costs, they may take the view that they have nothing to lose in referring the rent to arbitration, given that their worst case is that they must pay the full rent, which is payable under the lease in any event. But this is likely to be an uncommon outcome.
The ‘evidence to consider when negotiating’ (a non-exhaustive list) covers 20 matters that are likely to be relevant. This means an arbitration scheme may be considered not proportionate for smaller rent claims with non-institutional landlords and tenants.
There are wide-ranging consequences for insolvency processes. It will definitely be welcomed that individual tenants and guarantors can no longer be subject to bankruptcy proceedings in respect of rental debts where other remedies are restricted. The provision to prevent tenants seeking to compromise arbitrated rent via a voluntary arrangement for 12 months is an unprecedented fetter on directors’ ability to consider the full range of insolvency options if a business continues to struggle.
Richard Palmer, Partner and Graeme Dixon, Partner at Horwich Farrelly, specialist legal advisors to corporate and commercial sectors.
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