The Arbitration Scheme: resolving rent arrears in the wake of COVID-19

The Scheme is intended to protect retail, hospitality, leisure and other tenants who have viable businesses but which accrued significant rental arrears by having to close as a result of Covid-19 lockdown restrictions imposed by the UK Government.

Such tenants were protected from eviction and other enforcement measures during much of the Covid-19 pandemic through a package of temporary landlord restrictions. However, following the lifting of Covid-19 restrictions in summer 2021, the UK Government began consulting on how and when the temporary landlord restrictions should be lifted. The necessity of this was prompted by reports of soaring levels of commercial rent arrears in the UK between March 2020 and June 2021. One estimate, by the BPF, put this figure at £7.5 bn, of which 23% remained unresolved as at 30 June 2021.

As currently envisaged, therefore, the Scheme operates as a "backstop" to resolve rent arrears that accrued during a Protected Period ("Protected Period Arrears").

Different regimes apply in different parts of the UK. The Scheme is currently operational in England and Wales only.

Rent debts capable of being referred to the Scheme include debts due under business tenancies – i.e. leases of property occupied by the tenant at least partly for business purposes – in the following categories:

• principal rent,
• service charges,
• insurance rent,
• sums drawn down against a rent deposit, and
• interest on any of the above categories of payment.

At present it would appear that arrears of business rates and utility bills cannot be referred to the Scheme.

The Protected Periods are different for different industry sectors. This is because different sectors were subject to different periods of mandatory lockdown closure.

The UK Government Code sets out more information on the Protected Periods, along with a helpful timeline of statutory developments, and we summarise this information in the table below.

*Essential retail businesses were permitted to remain open throughout the Covid-19 lockdown periods. Retail businesses falling under this category include: food, supermarkets, hardware, homeware, convenience stores, off-licences, banks, post offices, laundrettes/dry cleaners, pharmacies, vets, pet shops, petrol stations, bicycle shops, taxi/vehicle hire, funeral directors, storage, building and agricultural suppliers, and car parks. 

Prior to making a reference to an arbitrator, the tenant or landlord must notify the other of their intention to make a reference. The other party will then have 14 days to respond. If no response is received, they can make a reference to any of the Arbitrator Bodies involved in the Scheme 28 days after giving notification.

Either a landlord or a tenant can refer the matter to an approved arbitrator until 25 September 2022. We note, however that the relevant Secretary of State has the power to extend this period through secondary legislation.

While a reference to the Scheme remains "live", all usual landlord enforcement options in respect of the Protected Period Arrears are suspended.

When making a reference, a party must send a formal proposal for dealing with the protected rent debts (such as a payment plan or proposal to write some debt off), along with supporting evidence. This must be sent to both the arbitrator and the other party. The other party then has 14 days to submit its own formal counter-proposal. After that, each then has 28 days to put forward revised proposals and counter-proposals. These 14 and 28-day deadlines are extendable if both parties agree or the arbitrator thinks it is reasonable.

The arbitrator must make their decision “as soon as reasonably practicable” after both parties have put forward (or could have put forward) their revised proposals. If an oral hearing is held, the award must be made within 14 days of this hearing.

Again, these timelines can be extended if both parties agree, or if the arbitrator thinks it would be reasonable to do so.

The arbitrator must apply the following two principles:

1. That their decision is aimed at preserving the tenant’s business (if viable) or restoring and preserving it (if not currently viable but could be if given the right amount of relief from payment). The decision must also be aimed at preserving the landlord’s solvency i.e. its ability to pay debts as they fall due.
   
   When assessing the viability of the tenant's business and the landlord's solvency, the arbitrator should consider the parties' assets and liabilities, previous rental payments made, the impact of Covid-19 on the both the tenant and the landlord's businesses, and other financial information as appropriate.
   
   

2. Without disregarding the first principle, the tenant should be required to pay its rent debt in full and without delay.
   
   

The arbitrator needs to assess the proposals put forward by both parties and decide which is most consistent with the two principles when making their decision.

Where neither proposal is consistent with these principles, the arbitrator has discretion to make their own award, subject to the proviso that any payment plan in such an award has a maximum period of 24 months.

The parties will typically be responsible for covering the costs of any legal and professional advisers in relation to the arbitration (the "Advisers' Costs"). Depending on the award, the parties may recover some of their own Advisers' Costs or be required to cover part of the other party's Advisers' Costs.

Separately, each arbitration body will set and collect fees for administering the arbitrations, to be published on its website (the "Arbitrator Costs"). If the arbitrator needs expert input from a third party – e.g. an insolvency practitioner or accountant – these will likely further increase the Arbitrator Costs. Generally, the party making the reference must pay all of the Arbitrator Costs in advance. When making their award, the arbitrator can require the other party to reimburse the applicant for half of the Arbitrator Costs, or such other amount they consider appropriate.

If one party requests an oral hearing, it must be held within 14 days of the arbitrator receiving the request (unless the parties agree another period or the arbitrators consider another timeframe appropriate). The party requesting the hearing must pay the costs of the hearing in advance) albeit the arbitrator can decide that half of the these costs are to be reimbursed by the other party if appropriate when making an award. But where both parties have requested the oral hearing, they are both responsible for meeting the upfront hearing costs.

The list of bodies set up to appoint arbitrators under the Scheme is set out on the UK Government website.

As at the date of this article, these are:

• Chartered Institute of Arbitrators (CIArb)
• Royal Institute of Chartered Surveyors (RICS)
• Consumer Dispute Resolution
• Falcon Chambers Arbitration
• Dispute Resolution Ombudsman
• London Chamber of Arbitration and Mediation (LCAM)
• The Consumer Code for Online Dispute Resolution (CCODR)

Where one or more parties to an arbitration under the Scheme seeks an oral hearing, the default option is for this to be held in public unless both parties agree otherwise.

However, once the arbitrator has made their award, they must publish details of the decision with their reasons for making it, excluding any confidential information.

Parties are excluded from the Scheme if the tenant is undergoing certain insolvency proceedings that relate to Protected Period Arrears. These include CVAs, IVAs and Companies Act 2006 insolvency compromises or arrangements. However, if the tenant exits any such proceedings and the Protected Period Arrears in question have not yet been resolved, then a reference to the Scheme may proceed.

Although not a strict exclusion from the Scheme, we would also flag that where parties to a dispute over Protected Periods Arrears have previously reached an agreement over such arrears, the arbitrator is obliged by statute to dismiss the reference. What might constitute such an agreement is not specified.

In principle, the Scheme sets out a mechanism for the resolution of unpaid Protected Period Arrears once and for all. The fact that the Scheme is binding will mean that one or more parties to a dispute over Protected Period Arrears are able to obtain a determination of the tenant's liabilities where the other party is unwilling to come to the table, which will deliver some much-needed certainty to many businesses.

In practice, however, we anticipate that landlords and tenants will share a number of concerns about the Scheme.

In particular, landlords may have concerns about the potential for significant delay in the arbitration process – and the likely knock-on delay in receiving payment. While there are fixed time periods for the parties to make a reference to arbitration and respond to each other's proposals, the current guidelines will likely mean the parties will be required to provide detailed financial supporting documentation, which will take time for the arbitrator to review. Depending on the volume of submissions by the parties, it could, for instance, potentially take an arbitrator several weeks or months at least to make an award. Such a level of delay would be unattractive to landlords, who may wish to use the launch of the Scheme as an opportunity to commence or resume settlement negotiations on a proactive basis, with the aim of securing faster resolution and payment of Protected Period Arrears outside of the Scheme. In addition, the Scheme does not at present appear to allow the parties to explore more creative or flexible solutions, such as entering into a reversionary lease, varying the lease, or surrendering early in return for payment of a premium.

The Scheme does not represent a silver bullet for tenants. Arrears accrued outside the Protected Periods are not covered under the Scheme, and so are subject to the usual landlord enforcement options, including debt claims, CRAR, statutory demands and winding-up petitions, and forfeiture. Furthermore, the Scheme requires the party making the reference to arbitration, which in most cases will be the tenant, to cover all up-front costs of the Scheme. Such costs could be significant if a tenant makes several references to the Scheme in respect of Protected Period Arrears owed under several leases. While there is scope for a successful tenant to recover part of these costs when the award is made, along with their own Adviser's Fees, the initial costs and the potential delay in resolving matters under the Scheme could discourage tenants from referring matters to the Scheme. Finally, the Scheme specifies that any payment plan pursuant to an arbitrator's award must have a maximum length of 2 years, which will place limits on tenants' abilities to defer repayment of Protected Period Arrears.

Nevertheless, the existence of the Scheme does represent a watershed moment in the context of tenant arrears accrued during the Covid-19 lockdown periods. The ability of parties to make a reference to the Scheme gives the possibility of drawing a line under the billions of pounds in Protected Period Arrears that have been accrued over the past few years. While cost and delay are potential disadvantages of the Scheme, the implementation of the Scheme itself is likely to prompt landlords and tenants to engage proactively over the resolution of Protected Period Arrears and avoid the need for referrals.

Co-written with Flora Raine