James Parratt, in our property litigation team recently wrote a piece for Property Week, exploring what the proposed new code and arbitration procedure will mean for commercial landlords and tenants.
The government has introduced a new code (the “Code”) and legally binding process (the “Arbitration Procedure”) for landlord and tenants of commercial property to assist them in reaching a resolution where a tenant has accrued rent arrears (and service charge and insurance arrears) relating to the period where a tenant was forced to close during the pandemic (the “Ring-Fenced Arrears”). A draft bill is making its way through Parliament, which will bring into law the Arbitration Procedure (the “Bill”).
The purpose of the Code and Bill is to assist businesses that have been affected by the pandemic but would otherwise be viable. They aim to encourage landlords and tenants to seek an agreement in respect of the Ring-Fenced Arrears, i.e. complying with the Code, or to use the Arbitration Procedure if an agreement cannot be reached.
The Code is voluntary and does not alter a party’s contractual obligations. It encourages parties to be transparent, collaborative, and to seek a unified approach when looking to reach an agreement. The Code and Bill do not affect agreements already reached by parties in respect of Ring-Fenced Arrears.
The Code also contains some (but not all) details of how the Arbitration Procedure will work and the protections afforded to tenants who invoke this process.
A party will have six months, from when the Bill comes into force, to refer the Ring-Fenced Arrears to an arbitrator for resolution.
When invoked, the Arbitration Procedure extends – and introduces new – protections afforded to tenants, including an extension to the current moratorium against forfeiture, prohibiting landlords from issuing a debt claim, staying existing proceedings, and from drawing down from a rent deposit.
The Bill states that it applies to tenancies which apply to Part 2 of the Landlord & Tenant Act 1954 (the “Act”). A strict reading of this means the Bill only applies to tenancies that have security of tenure, whereas the Code says the Arbitration Procedure applies to business tenancies as defined in the Act, which will include those tenancies that have excluded security of tenure. I suspect this point will be addressed as the Bill makes its way through Parliament as it seems nonsensical for the government to exclude a large section of commercial tenancies from Arbitration Procedure given their aim.
Parties who have been unable to reach a resolution in respect of Ring-Fenced Arrears should welcome a platform that will bring finality to this issue. Landlords may feel that they are further prevented from dealing with their properties in the manner they wish, whereas it may be too late for some tenants who have already made the decision to close as a result of pressure of being forced to pay the Ring-Fenced Arrears.
This article first appeared in Property Week.