UK COVID-19: The new arbitration scheme on COVID arrears – some questions and answers

What's it all about?

The government has published draft legislation which will enable landlords or tenants to apply to an arbitrator to settle disputes relating to payment of COVID arrears. Where the scheme applies, the arbitrator will have powers to write off arrears or defer payment.

When does the scheme come into force?

The draft bill has been placed before parliament and the legislation will come into force as soon as it is passed, which is expected to happen by March 2022. However, some provisions will be retrospective – for example, tenants will be entitled to a stay of any court proceedings for recovery of COVID arrears , to which the arbitration scheme applies,  issued on or after 10 November 2021.

What sums does the scheme apply to?

The scheme applies to all amounts due under business tenancies, including, service charges, interest and sums payable to top up rent deposits, however, the scheme is limited to sums which relate to a “protected period”.

What is a "protected period"?

A protected period is the period during which the tenant’s business was subject to restrictions as a result of the Coronavirus Regulations. The protected period commenced on 21 March 2020 and lasts until the earlier of (a) 18 July 2021 (in England) and (b) the last day on which the tenant’s business was subject to restrictions.

The draft legislation does not appear to contemplate multiple protected periods and so it seems that tenants who, for example, were able to open in summer 2020 but were then required to close again can treat the whole of the period through to when they were finally allowed to re-open in spring/summer 2021 as a protected period.

Also, the protected period includes a period during which any “specific coronavirus restriction” applied to the business which, for example, in the case of hospitality will include periods during which there were limits on the number of households and the size of parties.

For non-essential retailers (as opposed to restaurants, hospitality etc) the relevant date is likely to be 12 April 2021.

Which tenants can benefit from the scheme?

The scheme benefits all tenants who were required to close all or part of their premises or all or part of their business due to the Coronarvirus Regulations. It does not apply to tenants who may have voluntarily chosen to close.

Only tenants who are otherwise viable businesses (or would be viable if they received relief from COVID arrears) can benefit from the scheme.

Where a tenant has already compromised COVID arrears under a CVA it cannot then apply for arbitration of those arrears. It seems that this may also prevent the scheme being relied upon by tenants who implemented CVA’s pre-COVID where the CVA-discounted rents have continued to apply during COVID. Further, a tenant shall not be permitted to propose a CVA for 12 months after a referral to the scheme has been made.

What about guarantors?

The scheme only appears to contemplate applications for arbitration being made by landlords or tenants. However, guarantors will also benefit from the moratorium on court proceedings (see further below). Once rents are reduced or deferred by an arbitrator, the guarantor will only be liable for the reduced/deferred rent.

Are there time limits?

Either the landlord or the tenant may refer arrears which relate to a protected period to arbitration during a period of 6 months starting on the date the legislation comes into force. The intention appears to be that there will be no further protections for tenants who fail to apply for arbitration during the 6 month window.

Who will the arbitrator be?

The government is setting up a register of arbitrators. It is expected that most will be accountants or surveyors.

What can the arbitrator do?

The arbitrator will be able to write off or defer (for up to 24 months) payment of arrears which relate to a protected period. The legislation sets out high level principles which the arbitrator should take into account. For example:

• Any relief should be aimed to preserving/restoring the tenant’s viability provided that this is consistent with preserving the landlord’s solvency;
• So far as is consistent with the above principle, tenants should be expected to pay in full without delay;
• In assessing viability/solvency, the arbitrator is to take into account any financial information which it considers appropriate, however, the possibility of borrowing money or restructuring the tenant’s (or landlord’s) business is to be ignored.

The government has published an updated Code of Practice  which expands on the principles which should be applied. For example, the Code recognises that “where the tenant or landlord is part of a bigger group then evidence of affordability may include that wider context”.

The Code also states that “If a tenant business has not been able to pay any rent since restrictions were lifted this may be evidence that the tenant business is not viable” (so they cannot benefit from the scheme). This is no doubt intended to be an incentive for tenants to pay post COVID arrears. 

A copy of the updated Code can be found  here.

What about existing settlements/concessions?

The scheme cannot be used to re-open existing rent concessions/settlements which have already been agreed between the parties. Parties continue to be encouraged to reach settlements between themselves if possible in accordance with the updated Code.

What about court proceedings?

Landlords who issued court proceedings before 10 November 2021 are entitled to continue with those proceedings.

Where landlords issue proceedings on or after 10 November 2021, the tenant is entitled to have the proceedings stayed pending arbitration, and if judgment in such proceedings is given, a landlord may not enforce judgment until the six month window for invoking the arbitration scheme has passed or, if later, the conclusion of any arbitration referred within the six month window.

There are similar restrictions on forfeiture, CRAR and insolvency proceedings.

What about arrears outside of protected periods?

No protection or right to relief is given in respect of arrears for periods outside of a protected period (being arrears falling due after 18 July 2021 - or earlier for some businesses).

Authored by Paul Tonkin.