The Act came into force on the 25 March 2022. It introduces new restrictions and a mandatory arbitration process for “protected debts”. The protections afforded by the Act only apply to protected rent debts and therefore tenants should pay all unprotected rent debts to avoid enforcement action in relation to those debts.
What are protected debts?
A rent debt is ‘protected’ if:
- It falls due under a ‘business tenancy’ i.e. a tenancy comprising property occupied by the tenant for business purposes;
- It relates to rent and/or service charge and/or insurance rent and/or VAT and/or interest on the sums;
- It relates to a tenancy that was “adversely affected by coronavirus”; and
- The debt is attributable to a “protected period” i.e. from 21 March 2020 to either 18 July 2021, or the last day on which the tenant’s business was subject to a closure requirement or a specific coronavirus restriction, whichever is earlier.
What does “adversely affected” mean?
A business is considered to have been adversely affected by COVID-19 if it was required to close all or part of its business, or all or part of its premises, due to Coronavirus restrictions.
The Arbitration Process
The Act introduces a mandatory arbitration process for any disputes arising from protected rent debts within the next 6 months. The parties must refer the dispute to arbitration. The party intending to refer must give the other party notice of its intention to do so.
When the applicant (the party making the reference) makes the reference it must include a formal proposal for resolution and provide supporting evidence. Then if the respondent wishes to provide its own proposal and evidence, it has 14 days to do so. Both parties should refer to the arbitrator’s principles set out in section 15 of the Act and make sure that their proposals comply with those principles.
There is the opportunity for both parties to revise their formal proposals and it is recommended that both parties consider doing so.
The costs of the arbitration will be split equally between the parties, unless the arbitrator considers that one party should contribute more. Legal costs and other additional costs are to be borne by the parties and Landlord’s cannot recover legal or additional costs from the tenant even if the terms of the lease would ordinarily allow them to.
The arbitrator will decide the following:
- Is there a protected rent debt?
- Should the tenant be granted relief from having to pay the protected rent debt?
- If yes, what relief should be granted?
Arbitrators are permitted under the Act to make an award which includes on or more of the following provisions:
- Write off the whole or part of the protected rent debt;
- Allow the tenant time to pay the protected rent debt in instalments (as long as they are paid within 24 months of the award); and/or
- Reduce or write off any interest payable by the tenant on the protected rent debt.
In certain circumstances the reference will be dismissed by the arbitrator, for example where:
- The parties have already reached an agreement in relation to the protected rent debt;
- The tenancy is not a business tenancy;
- There is no protected rent debt; or
- Having assessed the viability of the tenant’s business, the arbitrator determines that the business is not viable and would not become viable even if it were awarded some relief from payment of the protected rent debt.
The effect of the award is to vary the terms of the lease agreement between the parties.
General restrictions on enforcement
The Act introduces a new moratorium on enforcement to support the arbitration process, which prevents a landlord who is owed a protected rent debt from using the following enforcement actions against a tenant in relation to that debt during the moratorium period:
- making a debt claim in civil proceedings;
- using CRAR in respect of the protected rent debt (i.e. seizing the tenant’s goods);
- enforcing a right of re-entry or forfeiting in respect of a protected rent debt; and
- making a withdrawal from a tenant’s deposit in respect of the protected rent debt.
The moratorium period runs from 25 March 2022 to either:
- (where the matter is referred to arbitration) the day on which the arbitration concludes; or
- (where the matter is not referred to arbitration within the 6 month deadline) the last day of that 6 month period.
Specific restrictions on insolvency
Company Tenants and Winding-up Petitions:
From 1 April 2022, during the moratorium period the landlord cannot present a petition for the winding-up of a tenant company or an LLP on the basis of a protected rent debt alone. The landlord would also need to be owed an unprotected debt.
Individual Tenants and Bankruptcy Petitions:
During the relevant period (from 10 November 2021 to the last day of the moratorium period), the landlord cannot present a petition for a bankruptcy order against a tenant who is an individual where the underlying debt is for a protected rent debt and where the demand was served or the claim was issued during the relevant period. Any such bankruptcy petitions should not have been made and may be regarded as void.
The restrictions on issuing winding up petitions/bankruptcy petitions against tenants apply equally to guarantors.
How does the Act impact ongoing debt claims?
If a landlord issued a debt claim against a tenant that included a claim for a protected rent debt on or after 10 November 2021, then the court must stay the proceedings on the application of either party. Once proceedings have been stayed the dispute may be resolved by arbitration. If judgment has already been made on such a claim and the tenant has not paid, then the tenant can refer the matter to arbitration to seek relief in relation to the protected rent debt.
There is discussion regarding the enforceability of judgments concerning protected rent debts given after 10 November 2021 and before 25 March 2022 in favour of landlords. Tenants should consider referring the matter to arbitration if they have not yet paid.
What about deposits?
The blanket rule is that landlords cannot draw from the deposit to cover protected rent debts.
If the landlord has lawfully taken a sum from the deposit to cover a protected rent debt prior to the start of the moratorium period, then the tenant is not required to top up the deposit before the end of the moratorium period, and the sum taken from the deposit will be considered unpaid rent and can therefore be referred to arbitration.
What happens to rent paid during the moratorium period?
If the tenant paid the landlord rend due at a time during the moratorium period when it owed the landlord both an unprotected and protected debt, then the rent paid must go towards the unprotected debt first. The same rule applies to rent paid between the last day of the protected period for the protected rent debt and 24 March 2022.
How does the Act affect Intermediate Tenants/Head Landlords?
In sum, the protections do not apply. An intermediate tenant/head landlord who is not in occupation of a premises for business purposes does not have a “business tenancy” for the purposes of Part II of the Landlord and Tenant Act 1954 and therefore does not benefit from the new protections provided by the Act.
Landlords and tenants would be wise to prepare for these changes and seek legal advice if necessary.
Article by: Ilana Hirschberg, Senior Paralegal at Central Law CIC