Compulsory Arbitration for Covid-19 related rent arrears

The last 18 months are without precedent. Covid-19 and the UK government’s response to it have presented extraordinary challenges in business, and the property world is no exception. Since the beginning of the pandemic, commercial landlords and tenants have been, in many cases, engaged in a battle with one another for financial survival. To many in the industry, it feels as if the rules of engagement were still being written long after fighting had commenced.

With the enactment of the Coronavirus Act 2020, the government stepped in to protect embattled tenants from landlords who might otherwise act to sue or evict them. It brought with it a number of tenant-friendly new provisions with which we are now relatively familiar, such as the moratorium on commercial evictions and statutory demands, as well as the furlough scheme and government assistance to help protect businesses and jobs.

Those provisions have doubtless saved many tenants in financial difficulty as a result of enforced lockdowns, but, they have also given rise to acrimonious disputes where landlords – often quite rightly – suspect their tenants of capitalising on the restrictions and failing to pay rent – even when they are perfectly capable of doing so.

The tactic for well-advised tenants has been to withhold rent, and to write to your landlord seeking concessions, such as a rent reduction or rent-free period. If is of course true that the legislation is meant only to apply to those tenants who are unable to make payments as a result of the pandemic.

However, the reality has been that it has largely operated as a complete bar to all evictions and insolvency action for non-payment, and tenant’s have, by and large, been able to breach their leases with something approaching impunity.

Enter the courts to redress the balance. There have been several well-publicised cases in the last few months, all summary judgment applications, and all finding in favour of landlords – in this case, the landlords of the Westfield Shopping Centre and the London Trocadero. Subject to any appeal, it is now clear that:

• the snappily titled “Code of Practice for commercial property relationships during the pandemic” (the guidelines so often touted by tenants as a supposed trump card) does not have the force of law, and therefore non-compliance with it does not necessarily defeat a claim for rent.
• there can be no implied term in a lease saving a tenant from paying rent where occupation of the property is made illegal by forced closures;
• the lack of such a term in a lease does not mean the contract between the parties lacked business efficacy; and
• the inability of a tenant to occupy premises as a result of the pandemic does not amount to a failure of consideration

In short, there is now no reason in law why a landlord cannot sue a tenant for rent and seek summary judgment. If the rent is contractually due, and there is no other compelling reason why the matter ought to go to trial, the landlord is likely to be entitled to summary judgment for the arrears.

Many commentators have therefore noted that there appears to be a marked shift of the pendulum back in favour of landlords as a result of these cases, and also in view of the fact that the moratorium on statutory demands is now at an end, and the moratorium on commercial eviction is set to end in March 2022.

However, there is yet more legislation on the horizon. According to some sources, the amount of commercial rent currently oustanding from the pandemic stands at £7 billion, and as a result, the government is planning on introducing new legislation before March 2022 to force landlords and tenants to come to agreement about how to deal with unpaid rent from the pandemic, or face a decision from an independent arbitrator.

Unpaid rent from the pandemic will be ring-fenced, and landlords and tenants will have to find a consensual solution as to how much should be paid and when. If they cannot do so an independent arbitrator will have powers to decide the matter (and presumably make an order in order to resolve it).

This form of statute-imposed arbitration is unprecedented in disputes over rent in the UK, and there will be inevitable questions as to how it will work, and whether it is likely to yield a better result for either party than the traditional court process.

Given the recent court decisions, it can be reasonably suspected that the process will be friendlier to tenants (or at least no worse than the court’s recent approach to summary judgment). That in turn will leave landlords who are currently owed rent with a decision about whether to continue to negotiate and submit to the new legislation, or to issue their claims for rent now, before the new law comes in, to take advantage of the current legal landscape which seems to favour landlords.

Given that compulsory arbitration is something of an unknown quantity and given the huge amount of unpaid rent arising from the pandemic, we may well see a spike in rent claims between now and March 2022. Thereafter, it seems likely that there will be scope for yet further disputes over historic arrears when the new legislation comes in.