IPs - Understanding Rent Arbitrations

On Monday 7th March, Malcolm Niekirk held one of his popular Coffee Break Briefing Webinars.

In the webinar, Malcolm looked at rent arbitrations and the opportunities for insolvency practitioners for IBR (independent business review) work. 

This is the summary from the presentation. If you’d like to watch it back, you can do so below. If not, read on for a summary.

(This article was written early in March 2022, looking ahead to the new law coming at the end of March 2022.)

Quick Links

Here are some quick links, and the topics I’ll be discussing, to help you navigate this long and comprehensive article quicker:

• Current restrictions on business landlords (ending on 25 March)
• Overview of the new law (Commercial Rent (Coronavirus) Act 2022)
• Arbitration provisions
• Viability and solvency
• IPs – Opportunities for instructions

A brief look at the current restrictions on the enforcement of landlord’s rights

These are going to be phased out soon

Forfeiture for rent arrears

• Currently not permitted for both legal proceedings and peaceable re-entry
• As of 26 March 2022, the landlord's rights to forfeiture will be re-instated
• These will be restricted by the new Act

Ban on bailiffs for commercial rent arrears recovery (CRAR)

• Until 25 March 2022
• Landlords can send bailiffs in only if more than 554 days in rent arrears
• That right will be phased back in from 25^th March 2022.

Restrictions on winding up petitions for rent arrears

• Landlords have to prove extra elements to be entitled to present a petition.
• And that is going to change at the end of March 2022 as well.

The new rent arbitration scheme will run inside a less restrictive moratorium than the current one.

What is the Commercial Rent (Coronavirus) Act 2022)?

It suspends landlord's rights for another six months.

In that time, either the landlord or the tenant can go to arbitration to get a binding ruling on how much of the rent arrears the tenant is going to be legally obliged to pay.

During that six-month period rent arrears recovery action is still suspended

The six month period may be extended, depending on the economy and how successful the rent arbitration scheme is

So, for insolvency practitioners, it will be an opportunity for new IBR work over at least six months, and possibly longer than that.

How are tenants protected under the Rent (Coronavirus) Act 2022)?

Tenants will be protected only if:

• The rent arrears are “protected rent” (unpaid rent for the “protected period”)
• And, the tenancy was adversely affected during Coronavirus

The protected period will depend on the type of business and how it was affected by government regulations.

A tenancy will only be treated as “adversely affected” if the business or part of it, or parts of the premises, were actually closed by government regulations during that time.

Take the case of a tenant who:

• Owes unpaid rent,
• For a business affected by Coronavirus,
• But where the unpaid rent does not cover the period when government regulations forced them to close.

That tenant won’t be protected by the new law.

What is the ‘protected period’ for my business?

The protected period will depend on the type of business.

These diagrams show the protected period by sector and location:

What types of rent relief will be available?

The arbitrator has many types of relief that they can grant to the tenant.

They can:

• Write off the debt. (In whole, or in part)
• They can give the tenant time to pay the debt (by a particular date, or in instalments)
• Reduce the interest rate that the landlord would otherwise be entitled to charge under the lease agreement.

Arbitration Provisions

How will the arbitration provisions work?

This legislation has been built on two sets of codes of conduct.

The first was published in June, 2020, and the most recent one was published in November last year.

Both codes of conduct encourage negotiations between the parties to resolve the unpaid rent.  The new legislation has some real incentives on that.

Starting arbitration

Either party can choose to start the formal arbitration process.

It might be in a landlord’s interests to start the process early if they want to start enforcing their rights and be paid.

It might be in the interests of the tenant to delay, if they're looking for more time to pay.

To start the process, the landlord or the tenant must give the other party their formal, written proposal (a best and final offer) and supporting evidence.

There's quite a lot of work that needs to be done before either party can make the formal proposal to start the arbitration process.

Counter-offers

The other can reply with a counter-offer – this really ought to be their best and final offer.

And if there is a counter-offer, the first party can revise their original offer.

After this, if no agreement can be reached within a short, set time, the arbitrator is then appointed.

How to appoint the arbitrator?

To appoint the arbitrator, the party who started the process approaches an approved organisation which will then appoint one of its members as arbitrator.

It's intended to be a swift way of finding an independent and impartial arbitrator.

When must an arbitrator dismiss an application?

The arbitrator has to dismiss the application if:

• The parties reach agreement first,
• It’s not a business tenancy;
• There’s “no protected rent debt”;
• The tenant’s business is not viable (and wouldn’t be, even with any kind of relief)

If this is the case, the landlord will then be able to enforce their legal remedies against the tenant.

What if the arbitrator thinks the tenant’s business is viable?

In cases where the arbitrator thinks that the tenant’s business is viable, then they have to decide whether the tenant should be granted some sort of relief from the unpaid rent and if so, what that should be.

A flip-flop arbitration

This is what's sometimes called a flip flop arbitration.   

The arbitrator must choose one of the proposals in front of them.  This encourages both sides to make sensible compromises and a reasonable offer in the hope that the arbitrator will choose it.  The arbitrator cannot impose their own compromise.

Viability and solvency

The statutory principles

The arbitrator cannot choose a proposal unless it fits the “statutory principles”.

Suppose neither of the proposals follows the statutory principles?

• The arbitrator must then write one that does. (This is the only circumstance in which the arbitrator can choose a middle position).

Suppose only one follows the statutory principles?

• The arbitrator must choose that one.

Suppose both follow the statutory principles?

• The arbitrator must choose the one that is the best fit.

This gives a big incentive, on both parties, to get proper professional advice.

What are the “statutory principles”?

The arbitrator’s decision must be based on the viability of the tenants' business and the solvency of the landlord’s business.

Suppose the tenant’s business is viable?

• The award should preserve its viability (but not if that does not preserve the landlord’s solvency).

Suppose the tenant’s business can become viable?

• The award should restore and preserve its viability (but not if that does not preserve the landlord’s solvency).

Remember:  If the tenant’s business cannot be viable, the arbitrator must dismiss the application.

The main “statutory principle” is the “viability of the tenant’s business”.

How is viability and solvency assessed?

The arbitrator must assess the assets, liabilities and any other relevant information to determine the viability of the tenant’s business.

The arbitrator would assess the landlord’s solvency on a similar basis.

The full details of that is in the Code of Conduct.  But, essentially, it’s an IBR.

The tenant’s evidence

The tenant will have to show that, if nothing changes, their business will either remain, or become, unviable and that the tenant’s proposals will make the right change to make and keep the business viable.

The role of an insolvency practitioner

As an insolvency practitioner, you could be instructed as an independent expert for the tenant.  Or you might be an independent, neutral expert to assess both sides’ evidence, and then report to the arbitrator.

In that second role, you won't be the arbitrator, but your conclusions and recommendations are likely to guide the arbitrator to the decision they should make.

The landlord's evidence

As an IP, you might find yourself being commissioned by the landlord, either to do an IBR on the tenant, or to review and critique the tenant’s IBR.

The landlord's evidence will have to cast doubt on the tenant’s. Your IBR might show:

• That the tenant’s business is not viable and won’t be viable.  (So the arbitrator refuses the application.)
• That the tenant’s business is viable, without any concessions.  (So the arbitrator makes no award.)
• That the tenant’s business is not viable but can become viable with the landlord’s proposal.  (So the arbitrator chooses the landlord’s proposals.)

What can’t the landlord’s evidence suggest?

The landlord cannot suggest the tenant should restructure its business

The landlord cannot suggest the tenant should borrow more money.

What if the evidence suggests landlord insolvency?

The landlord’s evidence may suggest that the tenant’s proposals will make the landlord insolvent. (So, the arbitrator cannot accept the tenant’s proposals.) 

This is an argument that landlords are not likely to run, unless they absolutely have to.  The consequence is that the arbitrator would have to reject the tenant’s proposals.  But, if the tenant then still can’t pay, that does not benefit the landlord. 

IPs and arbitrations - The opportunities for instruction

Insolvency practitioners may be instructed:

• To provide expert evidence to support either side;
• To give an expert’s appraisal of the other side’s evidence;
• To report to the arbitrator on both sides’ evidence.

Often you may be instructed to advise in advance of an arbitration while the parties are still negotiating.

These cases may lead to a commission later for a full IBR.

Where might the work come from, who are the gate keepers?

You may be approached by, or wish to approach, the following:

• Commercial property solicitors – especially those who specialise in landlord and tenant work
• Litigation solicitors – again, especially commercial landlord and tenant specialists
• Commercial agents
• Accountants (who may act for landlords or tenants)
• Arbitration organisations

Insolvency Law: Coffee Break Briefings

If you missed this briefing and would like to be involved in future webinars, you can click this link to sign up to our mailing list and be informed of upcoming webinars.

My next Coffee Break Briefing will be on rent arbitrations. Members of the email list will be sent more information soon.

Insolvency & Restructuring Solicitors near London, in Hampshire & Dorset, near Southampton and in Bournemouth, Poole, Christchurch and The New Forest

We hope you found the briefing useful. If you are an insolvency practitioner who would like to discuss the content of this article further, please do not hesitate to get in touch.