New Coronavirus Debt Legislation – Part 1 – What is Changing?
UK & Europe
UK Real Estate Insights
The Government is being bold. It is seeking, by law, to intervene in millions of private commercial contracts between landlord and tenants to restrain the enforcement of obligations in those agreements and to provide a single route for the resolution of pandemic arrears disputes by establishing an entirely new dispute resolution system. This is an ambitious undertaking. In our previous articles (Part 1 and Part 2) we explained the immediate impact on enforcement procedures and how this new arbitration process is likely to work. Here we look at a number of unanswered questions and try to decide – will the new arbitration process be a success?
The Bill provides, in effect, for any person or body to apply to be an arbitrator under this scheme. The question is whether anyone will want to?
Arbitrators under this Act will be asked to determine:
(a) are the pandemic arrears “protected” and in “scope” (a potentially complex legal question);
(b) the viability of the tenant’s business (a potentially complex accounting question);
(c) the solvency of the landlord (another potentially complex accounting question); and
(d) whether any proposal made by either party to the arbitration walks the fine line between these competing issues whilst respecting the ideal that the tenant should pay its rent.
We do not yet know what fees an arbitrator will be able to charge, but rumours suggest that fees will be capped. Will this, potentially daunting, task be attractive for a relative low fee?
If a tenant wants to seek an arbitration, it must make a formal proposal supported with evidence as to how the disputed debt should be dealt with.
Presumably, many tenants will ask for the debt to be written off.
But tenants must be careful about pushing their case too far.
The arbitrator is directed to decide, on the basis of the evidence put before him or her, whether the Tenant’s business will be “viable” even if an order for relief is made. If the arbitrator decides that the business is not “viable”, he or she must dismiss the arbitration. That in turn expressly has the effect of ending the moratorium on enforcement as regards that lease. In effect, that could force the tenant to have to pay in full or go into insolvency. The dangers of a tenant “overegging the pudding” on its financial peril are potentially significant.
The Bill is very confused on the point of how public or private the process is.
First, there is the issue of the formal notification and proposal which must be submitted with evidence to commence the process. Well advised tenants and landlords will not want this sort of sensitive commercial information in the public domain and will be advised to seek tight, pre agreed, complex and costly confidentiality agreements.
Additionally, somewhat confusingly, the Bill contains an obligation on an arbitrator to “publish” his or her decision – removing commercially sensitive information.
However, any in person hearings under the scheme are currently expressly stated to be public hearings so, presumably, anyone could attend and information would fall into the public domain and into the hands of competitors.
This highlights a particular issue with the Bill. The process is currently a hybrid somewhere between an arbitration under the Arbitration Act 1996 (an entirely private and confidential process) and something akin to an expert Tribunal, where matters are dealt with in public under prescribed rules.
Given the highly sensitive nature of the financial information that will likely have to be disclosed to the arbitrator and the other party – will landlords and tenants want to get involved with the process where there is every possibility of material entering the public domain?
The one thing that the new Code and Bill makes clear, on many occasions, is that parties are free, at any time, to agree whatever deal they want in respect of the protected debt.
When this is set against:
it is tempting to draw the conclusion that the Government, may in fact, really want landlords and tenants to just agree a deal rather than use the arbitration process. And that being the case – given that enforcement options will remain off the table for so long as any arbitration process runs – and that the tenant’s “viability” is being judged against the landlord’s “solvency” you could forgive landlords for thinking that the deck feels rather stacked against them – and therefore they may as well just agree with their tenant!
At first glance, it looks like the Bill when enacted will at least bring an end to the debate around pandemic arrears swiftly. Parties have only 6 months to make an application for an arbitration from when the Act comes into force – after which the moratorium on enforcement for that lease will end.
However, all deadlines, including the moratorium deadlines, can be extended should the Government think appropriate. It is possible to see the temptation for the Government to again extend the deadlines under the guise of providing further assistance to tenants – whilst hoping that the issue will just go away as landlords bow to the inevitable and give up seeking pandemic arrears.
Much will depend on who steps forward to take up the mantel of an arbitrator in this process.
If the money is right, perhaps there will be enough arbitrators to go around and the process will work well.
If, however, few people step forward – it is hard to see how the process will get off the ground at all.