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November 12, 2021

New arbitration procedure and Code of Practice to resolve outstanding COVID-19 related commercial rent arrears


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New arbitration procedure and Code of Practice to resolve outstanding COVID-19 related commercial rent arrears

On 9 November 2021, the Government announced that a new binding arbitration procedure and Code of Practice will be introduced to resolve unpaid commercial rent arrears resulting from the COVID-19 pandemic.

Code of Practice

The Code applies from 9 November 2021 and is intended to provide a clear process for resolving disputes over rent owed due to business premises having been closed and/or business having been restricted during the COVID-19 pandemic. It is therefore relevant for all commercial rent debts (including service charges and insurance) accrued since March 2020 within England, Wales, Northern Ireland and Scotland, regardless of whether the debts owed are in scope of the Commercial Rent (Coronavirus) Bill (the Bill) (for which, see further below).

If a tenant is unable to meet its financial obligations under a commercial lease, the Code encourages the landlord and tenant to negotiate and, if agreement is reached, to document this in writing. To guide such negotiations, the Code details the scope and contents of the Bill (including the creation of a binding arbitration process), seeks to promote best practice by participants involved in the arbitration, and sets out the principles that landlords and tenants should take account of when seeking to resolve rental disputes.

The Code, which replaces the ‘Code of practice for commercial property relationships’ issued on 19 June 2020 and updated on 6 April 2021, can be found here: Code of Practice.

Arbitration procedure

The Bill was introduced to Parliament on 9 November 2021 and is expected to come into force by March 2022. If the Bill is passed, from 25 March 2022 a legally-binding arbitration process will be used to resolve outstanding landlord and tenant disputes (i.e. disputes that could not be resolved through negotiation in accordance with the principles of the Code of Practice). The laws will apply in England and Wales, with Northern Ireland having a delegated power to introduce similar legislation.

The arbitration procedure will apply to debts incurred under business tenancies by businesses that were mandated to close, in full or part, during the COVID-19 pandemic (ring-fenced debt). In England, it will therefore cover debts incurred in the period from 21 March 2020 to the earlier of (a) 18 July 2021 and (b) the last date on which the tenant’s business was subject to restrictions. However, debts accrued during other times, or incurred by businesses that were not forced to close, will not be within scope. Applications to commence arbitration may be submitted by a tenant or landlord within 6 months of the legislation coming into force and payments are to be made as soon as practicable and in any event over a period of no more than 24 months. The arbitration procedure cannot be used to change pre-agreed settlements (at least, presumably, without the consent of both landlord and tenant).

Moratoriums and other restrictions

The existing moratorium on forfeiture and restrictions on landlords using the Commercial Rent Arrears Recovery process are set to remain in force until 25 March 2022 (for further detail, see Relief for tenants and CIGA extended - yet again) and the existing restrictions on issuing winding-up petitions in relation to unpaid rent are set to remain in force until 31 March 2022 (for further detail, see Tapering of CIGA restrictions on use of winding up petitions). Such restrictions will continue in relation to ring-fenced debt until either (a) the application period for arbitration expires if no application is made or (b) if there has been an application for arbitration, when the arbitration concludes, which includes the final determination of any appeal.

Following the expiry of the existing moratorium and restrictions set out above (towards the end of March 2022), for debts outside the scope of the Bill’s binding arbitration process, landlords will be able to exercise their ordinary remedies in the ways they did prior to the introduction of the moratorium and restrictions in March 2020.

Finally, the Bill will have retrospective effect in that, for the period from 10 November 2021 to the date on which the legislation comes into force it will:

  1. prevent a landlord from petitioning for the bankruptcy of a business tenant due to non-payment of a statutory demand or judgment debt which relates to ring-fenced debt (with any such petition served, or order made, being void); and
  2. allow any debt claim issued during this period which relates to ring-fenced debt to be stayed, and eligible for the arbitration procedure.
"Today’s measures 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." Business Secretary Kwasi Kwarteng

Authors and Contributors

Alexander Wood

Of Counsel

Financial Restructuring & Insolvency

+44 20 7655 5935

+44 20 7655 5935