Uncertainty surrounds unpaid rent arbitration scheme, says Royds Withy King

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Landlords and their tenants face a new and uncertain arbitration scheme when looking to recover unpaid rent debts which relate to periods of forced closure during the pandemic. Some may choose to avoid the arbitration scheme entirely, says property lawyers Royds Withy King.

The general restrictions on landlords seeking to recover unpaid rents are expected to lift after 25 March 2022 in relation to so-called ‘unprotected rent debts’, allowing commercial landlords to take enforcement action. From 1 April 2022, they will once again be able to issue statutory demands and winding-up orders against tenants in relation to them.

The Commercial Rent (Coronavirus) Bill is currently making its way through parliament and is set to be passed into law on 25 March 2022. The Bill introduces the new concept of ’protected rent debt’ which if an agreement cannot be reached, can be resolved via a newly set up arbitration scheme.

Ian McEwan and Paula Green, Partners in the Property Disputes team at Royds Withy King explain that the arbitration scheme is a potential cause for concern with both landlords and tenants given the uncertainty in how the scheme will work.

“Protected rents are those that fall into the period of forced closure, broadly between March 2020 and July 2021, and can only be recovered by mutual agreement between the parties or through the arbitration scheme. It is the lack of clear guidance on how the scheme will work that may make some landlords and tenants hesitant to use it.

“Draft guidance on how arbitrators should exercise their powers under the scheme has now been produced, but questions remain over the information that parties should submit in support of their positions, and how consistent the arbitrators’ awards will be.

“In reaching a decision arbitrators will have to consider the proposals put forward by each party on how much of the protected rent debt they consider should be paid, together with any evidence provided in support of the proposal.”

Arbitrators will need to apply the “principles” set out in the Act, namely that:
• The award should be aimed at preserving or restoring and preserving the viability of the business of the tenant so far as that is consistent with preserving the landlord’s solvency; and
• The tenant should, so far as it is consistent with the first principle, be required to meet its obligations as regards the payment of protected rent in full and without delay.

“The arbitrator is required to make an award based on the proposal that is most consistent with these principles. If they consider that neither proposal is consistent with the principles then the arbitrator may make whatever award they consider appropriate applying these principles,” explains Ian McEwan and Paula Green.

“The guidance suggests putting forward a variety of financial, and potentially sensitive information in support of a party’s proposal, but some parties may not wish to share much of this or to spend the not inconsiderable time required to compile it all.

“Landlords and tenants are also concerned about the consistency of decisions, particularly as different awards may be handed down in different parts of the country by different arbitrators where the facts are essentially the same. Arbitrators have, for example, the ability to completely wipe the rent debt away or agree a repayment schedule over a period of up to 24 months.

“It is unclear how long the process will take. The window for referral to the scheme is initially open for a period of six months, with estimates on arbitrations taking between three and twelve months to complete not including any time for appeals.

“In general, it is expected that the parties will share the costs of the Arbitrator’s appointment and the costs of any hearing.

“An assessment will need to be made as to whether the arbitration scheme is appropriate in each case. Issues such as the value of the debt, the parties’ conduct, record keeping, and their plans for the future will be relevant considerations in deciding whether to make a referral to the scheme. But for many landlords and tenants reaching a negotiated settlement, over which they will have greater control and certainty, may be preferable.”

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