UK COVID-19: Government introduces mandatory arbitration scheme for pandemic rent arrears

In June this year, the government announced further support for commercial tenants, including a binding arbitration process to resolve disputes between commercial landlords and tenants relating to arrears that had built up as a result of the pandemic. 

Some five months later, the government has introduced to Parliament draft legislation, in the form of the draft Commercial Rent (Coronavirus) Bill, expected to come into force in March 2022, which will govern the proposed binding arbitration process.  

The government has also announced a new Code of Practice which, according to the government’s announcement, provides “landlords and tenants with a clear process for settling outstanding debts before the new arbitration process comes into force”.  This replaces the ‘Code of Practice for commercial property relationships’ originally published in June 2020 and updated in April 2021.

The government’s clear intention is for landlords and tenants to resolve their rent arrears disputes prior to the Bill coming into force.  This has been reiterated by Business Secretary Kwasi Kwarteng who has made clear that the government wants to encourage landlords and tenants to “keep working together to reach their own agreements ahead of the new laws coming into place”, and the government expects “tenants capable of paying rent to do so”.

According to the government’s announcement:

• The arbitration process is expected to come into force from 25 March 2022.
• The arbitration process will apply to businesses that were “mandated” to close “in full or in part”, but arrears “accrued at other times” will not be “in scope”. 
• The arbitration process will apply to certain businesses including “pubs, gyms and restaurants”. 
• Either party can apply for arbitration unilaterally “as a backstop after negotiations have failed”. 
• The window for a referral to arbitration will be six months from the date that the Bill comes into force. 
• The maximum timeframe in which an arbitrator can order any rents to be paid is 24 months. 

The Code of Practice will continue to reiterate that tenants who are “unable to pay in full” should negotiate with their landlord “in the expectation that the landlord waives some or all rent arrears where they are able to do so”.  However, given that the previous Code of Practice has been of limited use, some may be sceptical about the new Code of Practice having any material impact on ongoing negotiations between landlords and tenants.

The government has also announced that it is offering immediate protection to commercial tenants from debt proceedings.  For those landlords who have been utilising debt proceedings at court to encourage tenants who can pay to do so, this news will be unwelcome and remove the final remedy available to them.

Authored by Mathew Ditchburn and Benjamin Willis.