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Coronavirus Commercial Rent Arrears: First Arbitration Awards Published

The Commercial Rent (Coronavirus) Act 2022 (CRCA) came into force on 24 March 2022. It ringfences rent debts built up as a result of mandated business closures during the COVID-19 pandemic and introduces a new binding arbitration process aimed at resolving disputes relating to those protected rent debts where landlords and tenants have not been able to reach an agreement on how those debts should be dealt with. You can find a more comprehensive review of the CRCA here.

The first three awards have now been published under the binding arbitration scheme by Falcon Chambers Arbitration.

Signet Trading v Frop Offices (Nominee)

Signet, more commonly known as the H Samuel chain of jewellers, had accrued rent arrears of almost £450,000 in relation to their office headquarters in Hertfordshire, where only two members of staff remained working during the pandemic. Signet argued that whilst offices were not premises required to close by the restrictions, the purpose of the office was merely to support the retail business which was required to close. They described the office as an ancillary part of the retail business. Therefore, they alleged that their business was adversely affected even though it does not operate from the specific premises where rent arrears had accrued.

The arbitrator rejected this and determined that the office was not subject to a closure requirement during the pandemic and therefore rents falling due under that office tenancy would not be “protected rent debts” as defined by the CRCA. As a preliminary issue, the award in this case assessed the tenant’s eligibility for the scheme rather than viability and affordability.

The arbitrator also gave a provisional ruling that Signet should pay for the landlord’s costs of the arbitration, which appears to run counter to sections 19 and 20 of the CRCA which give the arbitrator power to award costs in respect of the arbitrators’ fees and expenses. This may act as a deterrent to tenants considering a reference to arbitration on the basis that they have nothing to lose.

This decision also raises a question as to the potential consequences for tenants of offices had Signet been successful on their point. We may have been looking at an arbitrary two-tier system of office tenancies. On the one hand, offices occupied by tenants whose principal business was retail or hospitality might have been entitled to relief from rent arrears, whilst office tenants unconnected to a retail business would have fallen outside of the scheme.

KXDNA Limited v 60 SA Limited

In the second case the award under the new scheme is a partial one that mainly focusses on procedure, specifically what is likely to be regarded as a “proposal” under the CRCA

Both parties agreed that the arrears should be repaid via instalments. The tenant proposed to pay £407,000 in instalments, with the tenant’s expert claiming that this was the maximum amount it could pay and remain viable. The landlord’s proposal was for the tenant to pay just over £1.35m, also supported by expert evidence.

After it transpired that there were some errors in the landlord’s expert evidence, the landlord was given a limited permission to amend its initial proposal set out under an Arbitrator’s Order, which allowed the landlord to serve an amended initial proposal which highlighted the changes made as permitted by the Arbitrator.

The landlord filed its amended expert report with a covering letter setting out its “amended initial proposal”, but the tenant contended that the landlord had gone beyond the amendments permitted by the Arbitrator’s Order and therefore constituted a “revised proposal” under section 11(4) of the CRCA.

The Arbitrator agreed that the landlord’s amended proposal did not accord with the Order and should remain in its original form.

The Arbitrator also felt that the landlord’s covering letter was not a clear “formal proposal” under the CRCA.  Section 11(7) of the CRCA requires any “formal proposal” to be “expressed to be made for the purposes of this section”, which infers a need for parties to be clear as to what is and is not a formal proposal within the statutory scheme.

Since the covering letter did not say that the proposal was made for the purposes of section 11, the Arbitrator felt that it could not amount to either an amended initial “proposal” or a “revised proposal”.  This will subsequently allow the landlord to make a revised proposal within the arbitration process in due course.

Commerz Real Investmentgesellschaft mbH v RHL Realisations 2022 Limited

The third award concerns the eligibility of the reference to arbitration in light of the tenant entering into liquidation and the impact on the viability of the tenant’s business.

In this case, the tenant had accrued rent arrears totalling over £81,000. The Arbitrator was required to determine whether the dispute was eligible for the grant of relief. One of the conditions of eligibility is that the tenant’s business must be viable or could become viable if awarded relief from payment of the rent debt.

The Arbitrator confirmed that the fact that the tenant was in voluntary liquidation did not automatically stay the arbitration under the Insolvency Act 1986 (although neither party had sought to stay the arbitration in this instance).

The Arbitrator therefore proceeded to make an award based on the information provided to the Arbitrator, which was fairly limited in this case, and determined that the tenant’s business was not viable and would not become viable even if relief from payment of the rent debt was awarded. The dispute was therefore not eligible for the grant of relief and was consequently dismissed.

Comment

These awards have begun to provide some clarity on the application of the scheme in practice, and hopefully more so in future award publications, however the number of awards we are likely to see in the coming weeks and months remains to be seen.

The deadline to refer a dispute for arbitration under the CRCA is 23 September 2022, and at this stage there appears to be nothing to suggest that the government has any plans to extend it. With this in mind, as the applicant first needs to give notice to the other party of their intention to refer the matter to arbitration and allow 28 days to pass before making the reference, any party interested in using the scheme would be well-advised to take action by mid-August at the latest.

This alert does not provide a full statement of the law and readers are advised to take legal advice before taking any action based on the information contained herein.

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