Government publishes draft legislation for arbitration of pandemic rent arrears disputes in England

The code is intended to help commercial landlords and their tenants resolve any remaining commercial rent disputes which arose during periods of forced closures during the pandemic. A new Commercial Rent (Coronavirus) Bill, which is being introduced to parliament, will from next year establish a legally-binding arbitration process in England and Wales for commercial landlords and tenants who are unable to come to an agreement on rent arrears which arose during periods of forced closure.

The government in Northern Ireland will be given the power to introduce similar legislation. The rules in Scotland differ as a result of different property legislation and market conditions, although the code of practice applies UK-wide.

The government has already legislated to prevent “forfeiture” of leases due to arrears of rent, even if those arrears accrued before the pandemic, under the vast majority of business tenancies in England and Wales, until 25 March 2022. From today, commercial tenants in those jurisdictions will also be protected against debt claims by landlords for pandemic rent arrears, including County Court judgments (CCJs), High Court judgments (HCJs) and bankruptcy petitions.

Business secretary Kwasi Kwarteng said that the new measures would “provide commercial landlords and tenants with the clarity and certainty they need to plan ahead and recover from the pandemic”.

“We encourage landlords and tenants to keep working together to reach their own agreements ahead of the new laws coming into place, and we expect tenants capable of paying rent to do so,” he said.

The new measures are targeted in particular at businesses which were required to fully or partially close under public health legislation during various periods from March 2020 onwards, including pubs, gyms and restaurants. They do not apply to any other types of debt accrued at any other time.

Trade bodies including UK Hospitality, the British Retail Consortium (BRC) and the British Property Federation (BPF) welcomed the new code of practice, although the BRC warned that “the devil will be in the detail” of the compulsory arbitration scheme. The government intends for the new legislation to come into force by 25 March 2022, when various current legislative protections for most commercial tenants end.

The government indicated in August that it would introduce compulsory arbitration for disputes over rent arrears which arose during periods of forced closures during the pandemic. It has now confirmed that the scheme will be available as a ‘backstop’ after negotiations have failed, and that either party will be able to refer a dispute to arbitration unilaterally, albeit only after having given notice of its intention to do so and the expiry of a prescribed timeframe. Parties will be given six months from the date that the legislation comes into force within which to apply, and a maximum time frame of 24 months will apply for the repayment of any arbitral award.

Arbitrators who determine rent arrears cases under the new scheme must be approved by the government, in accordance with guidelines to be set out in the legislation. The government will publish a list of approved bodies on the website of the Department for Business, Energy and Industrial Strategy (BEIS) in due course, and parties will be expected to apply directly to an approved arbitration body.

The government stressed that the scheme was intended as a last resort, and that landlords and tenants should negotiate their own agreements where possible. The new code of practice will contain additional information about alternative forms of dispute resolution, including mediation.

The new code of practice replaces the code published on 19 June 2020 and revised in April, which was endorsed by the UK’s main trade bodies. It is based on the principle of landlords and tenants negotiating how they can share the cost of pandemic-related commercial rent arrears, where tenants are unable to pay in full. Tenants which are unable to pay in full are expected to negotiate with their landlord “in the expectation” that the landlord waives some or all of the debt, if it is able to do so.

Property disputes expert Richard Bartle of Pinsent Masons, the law firm behind Out-Law, said: “Over the past few months, both landlords and tenants have nervously awaited the detail of the legislative proposals introduced today.

“The proposed new scheme, which is still, of course, in draft and subject to amendments, allows arbitrators a relatively wide degree of discretion in a number of matters, including determining whether to dismiss the reference to arbitration, determining whether and what relief from payment should be awarded to a tenant, and who should bear the costs of the arbitration,” he said.

“It seems almost inevitable that various elements of the proposed legislation, assuming it comes into force in the published or a similar form, will need to be tested. Whilst the proposed new scheme requires that arbitral award must be published alongside the arbitrator’s reasons for making the award, those awards and reasons will not create authority which binds other arbitrators. Due to the relatively wide discretion conferred on arbitrators by the draft legislation, it is possible that different arbitrators could come to different decisions even where there are similar facts,” he said.