Commercial Rent (Coronavirus) Bill

Written evidence submitted by the Property Litigation Association (CRCB07)

Comments and submissions on the Commercial Rent (Coronavirus) Bill

The Property Litigation Association is an association c omprising of over 1500 solicitors whose main area of practice is property litigation. Our membership represents both landlords and tenants. The views expressed below are those canvassed from a number of our members that have particular expertise in relation to the subject matter of the Bill. The comments below relate to legal issues we have identified.

We do not comment on the policy of the Bill but you will note our concern that the Bill as currently drafted will not assist the parties in the way that might have been originally envisaged.

H ow will it work in practice ? Potential issues with the arbitral mechanism and other consequential issues

1. The Bill covers "Business Tenants" and, as the Property Ba r Association in its submission refers, there are legal consequences of such definition including those relating to service of documents. The Bill does not contain provisions as to service thus creating uncertainty and potential litigation.

2. The Bill requires referrals to arbitrations to be made within 6 months of the commencement of the Act . T here is no definition as to what constitutes a reference to arbitration and given the tight timetable there are likely to be late references and resultant litigation to determine whether the action take constitutes a valid reference. If a reference is simply a request made to an approved body to appoint an arbitrator it would be useful if the Bill stated this.

3. Is it the intention that if a party fails to start the process set out in clause 10 within 5 months then they are pr ecluded from making a reference? The current language indicates that if the steps required by clause 10 are not carried out no valid reference can be made. If this is the case it needs to be made clear that parties only have 5 months in which to start the process.

4. T here is a question as to whether there will physically be enough arbitrator s to deal with the claims or that there will be a robust system in place to ensure that the arbitrations can be conducted in accordance with the timeframes anticipated in the Bill .

5. There is a real risk of delay to the appointment of arbitrator s and to procedural timetables once the appointments are made if the number of arbitrator s is limited and they are tak ing on multiple referrals. At the second reading of the Bill, a question was raised about whether a brand new, fully operational arbitration process can be in place by March next year and whether the Government’s desire to set up the arbitration work so quickly is realistic given the pressure on the business and public sectors at this time.

6. There is a point of practicality regarding the parties having relatively little time to go through all the necessary notification steps required prior to a referral, and prepare the evidence/submissions needed at the point of referral, within the initial 6 month period. The fact that the 6 month period can only be extended by G overnment, not the parties , puts a lot of pressure on parties to trigger the arbitration process once the Act comes into force , and leaves little time to focus on or continue negotiations for the settlement of the arrears . We believe it be appropriate to enable the parties to extend the 6 month period by agreement in the same way as they can do with an application for a renewal of a business tenancy pursuant to section 29 of the Landlord and Tenant Act 1954, but with a long stop date of, say , 12 mon ths, from the commencement date.

7. The timescales of the arbitration process are very tight. Once a referral is made, the counterparty must put in proposals with supporting evidence within just 14 days, with revised proposals submitted by the parties in successive two week periods. While time can be extended by agreement of the parties, there may be tactical reasons why one party refuses to do so.

8. The lack of an obligation of a party to make full disclosure of all relevant evidence prevents the other party from making an informed formal proposal. Whilst clause 11 of the Bill requires parties to put forward formal proposals with "supporting evidence" there is no requirement to provide evidence "adverse" to a proposal, which may set out the basis for challenging a proposal or formulating a counter-proposal . Assessments of viability may well involve consideration of documents that are not in the public domain and are therefore not accessible to counterparties or the arbitrator . This may lead to procedural arguments about disclosure that could lead to delays.

9. Clause 14 (2) and (9) refers to a final proposal put forward under clause 11. There may well be circumstances in which relevant evidence is provided by a party after the "final proposals" have been submitted. Should not the obligation on the arbitrator be to consider the last proposal received from each party rather than limit this consideration to a proposal that was made before each party had the opportunity to consider, challenge and test all the evidence?

10. The decision making process outlined in clause 14 requires the arbitrator to follow the designated process, and if one party has followed the procedure and the other not the arbitrator must make the award for the amount submitted by that party. This is likely to lead to anomalous and unfair results especially if a party is not represented or simply does not understand the Bill's requirements and procedures. This procedure is inconsistent with the obligations set out in the Arbitration Act 1996.

11. While the intention of the Bill is to create a structure for relatively quick determination , the sequencing of events in the Bill could well lead to the court determining that the process is procedural ly unfair and thus nullify all arbitrations. We believe that it is imperative that the procedural requirements follow the usual rules of natural justice and that the current formal proposal rules be amended.

12. There are a number of questions over the extent to which certain arrears will constitute a protected rent debt and/or the extent to which tenants were subject to a closure requiremen t during the protected period. The arbitration process (and associated moratorium) will on ly apply to protected rent debt .

13. As highlighted above, there are some potentially difficult questions of interpretation of the Bill as it is currently drafted that might need to be decided, whether by the arbitrator or the court, as preliminary issues before consideration of the parties’ proposals and of the tenant’s viability. However they are de termined, these issues are not really catered for within the short, tightly-confined procedures anticipated in the Bill and could lead to more delays, inconsistency between court judgments and awards on issues of interpretation , and appeals on important questions of the interpretation of the Act.

14. It is very likely that there will be a number of referrals where the tenant has different landlords. These referrals may be made by different landlords to different arbitration bodies with the consequence that different arbitrator s will be making different findings o f fact on very similar evidence, especially in relation to viability. What is the status of arbitral awards made in respect of a particular tenant’s viability in arbitrations concerning the same tenant entity (or entities within the group)? Will they be "binding"?

15. D ifferent arbitrator s can make different procedural orders that would not be subject to any appeal. In other words, different evidence relating to the same tenant will be before different Tribunals probably resulting in in consistency of awards .

16. There is potential for significant cost/time being incurred fighting multiple arbitrations. Where parties cannot agree on the consolidation of arbitrations, how does the arbitrator decide the point under the modified section 35 powers? Where multiple referrals have already been made and different arbitrator s are appointed, how, logistically do parties go about making applications to consolidate? Is this to be left to the parties of the approved body to monitor and/or do the approved bodies, acting collectively, have to keep a central register of all referrals or does the tenant have to disclose that it has other arbitrations?

17. There is no specific definition of what constitutes viability. Whilst clause 16 of the Bill sets out a number of factors that arbitrator s should consider when assessing the viability of a tenant’s business and the wider code of practice includes a non-exhaustive list of evidence that could be considered when determining viability and affordability, the parameters are not clear cut. Is viability the ability to trade and make a profit using HMRC guidance i.e. the tenant must be able to show and intention to make a profit and make a profit within a number of years (HMRC Business Income Manual) or is viability more closely aligned to solvency i.e. the ability to secure funding to meet all its commitments, including rent during a period, whether 24 months or such other period as the arbitrator might decide?

18. Is it intended that viability is confined to a particular premises let by one landlord or is viability an assessment of the totality of the tenant's business which may cover several premises in within a short distance of each other or may cover premises throughout the county or internationally . The business may not be confined to retail sales. There are a number of issues the Bill does not address that will have to be left to the courts. This is most unsatisfactory.

19. The considerable latitude and lack of guidance given to arbitrator s and the very confined appellant procedures is likely to result in a number of conflicting awards that will provide little guidance for other arbitrator s.

20. The guidance notes refer to matters the parties should take into consideration during negotiations but the guidance notes are of little or no assistance to the arbitrator as it is neither statutorily binding nor adequately detailed. Bearing in mind that a reference to arbitration will result because the parties have not reached a compromise , the issue of viability is likely to be a highly contentious area and will almost inevitably result in references to the courts. If, as a matter of policy, the government is wanting consistency and wants an arbitrator to decide whether a business is viable it is suggested that more detailed parameters are provided. It should be borne in mind that most businesses rely on the support of third party funding and if the business is continuing to trade the balance of probabilities would suggest that the persons with the greatest knowledge of the business and those that have a stake in it believe it to be viable otherwise it would have ceased trading prior to any reference.

21. As the Code acknowledges, b usiness models vary hugely, and there is a question mark over the period of time during which viability will be assessed (and it should be borne in mind that different sectors will recover at different rates). The Bill assumes that arbitrator s will have the necessary skills to determine the viability of a business , whose turnover could range between under £100,000 to multi millions of pounds . The Bill does not appear to have considered the enormous adverse reputational issues of an arbitrator 's finding that the business is not viable notwithstanding the fact that the tenant's funder believes there is a viable business.

22. The fact that awards and hearings will be public has the potential to cause serious concern to landlords and tenants, where questions of viability and solvency are being considered by the arbitrator s on the issue of relief. The act of calling into question the viability of a business may be enough to cause other suppliers to withdraw credit facilities causing the premature closure of the business.

23. The Bill makes reference to the ability to redact confidential matters from an award. How is this reconciled with the fact that the disclosure of this information will have taken place in a public forum ? Indeed, there is likely to be considerable discourse on confidential potential issues during such a hearing.

24. The possibility of an adverse ruling on viability may deter some tenants from pursuing a claim through the scheme . Clause 20 of the Bill requires an oral hearing to be held on the application of either party – there is no discretion of the arbitrator to determine whether this is suitable where the parties are not in agreement. This may result in the threat of an oral hearing being used as a tool to pressurise a party who has concerns about their financial affairs being made public to settle .

25. It is unclear how the government proposes to control the fees of the arbitration process. The Secretary of State retains delegated powers to set a cap on the fees charged (with no indication whether the cap could be imposed during an arbitration or only in relation to prospective arbitrations) , which they may do, but it is not clear how much all of this is going to cost tenants who are already facing large arrears bills, and landlords who have been affected by non-payment of their rent.

26. Questions of viability could require a lot of evidence, factual and expert, which will inevitably be costly. How will this impact the fairness of the arbitration process if one of the parties cannot afford legal/accountant fees?

27. It is anticipated that there will be a number of cases where there will be significant costs incurred in obtaining the evidence and ensuring it is presented to the arbitrator in a manner that makes it understandable. If costs are to be limited should the arbitrator retain the power to make a cost award against a party who has not acted properly, whether by failing to provide evidence or making the process of evidence gathering more expensive. The extent of the arbitrator's powers to make awards on costs is unclear. It is not clear how the general power under section 61 of the Arbitration Act should be applied in light of clause 19 of the Bill.

28. The assumption is that clause 8 (6) requires arbitration bodies to publish the fees payable by the parties to the arbitration body to provide an arbitrator. It does not appear practically possible for the arbitration to provide a fixed fee that covers all possible references. We are concerned that the lack of clarity as to the requirement under this provision will result in fewer arbitration bodies being appointed as approved bodies and it may also result in fewer potential arbitrators putting themselves forward to act as arbitrators . Indeed, it might reduce considerably the number of quality arbitrators who are capable of dealing with complex arbitrations being available if fees are limited. This increases the chances that the outcome is more akin to a lottery than a properly considered judicial decision.

29. The cost of an arbitration is not necessarily proportional to the value of the dispute. Low value disputes can be expensive to resolve and high value disputes can be much cheape r to resolve. Unlike the court, arbitrator ' s fees are paid by the parties and no doubt arbitrators will want to ensure they are paid at a commensurate rate for the work they carry out .

30. The Bill is creating a mechanism whereby the rent due can be varied by an arbitrator. It would assist the parties if the Bill included a provision that set clearly the consequential effect on section 17 of the Landlord and Tenant (Covenants) Act 1995 so as to avoid further satellite litigation.

31. The PBA raises the position of management companies and mixed use developments. The PLA share the same concern.

32. Under clause 24 it appears that an application for a CVA/IVA/s.896 or 901C can be made between the period after an application for a reference to arbitration but before the actual appointment of an arbitrator. The appointment of an arbitrator can take days or weeks; the appointment is not instantaneous as conflict checks and availability have to be checked.

33. There appears no reason why there is a 12 month period in 24 (3) (a). Once the award has been made why should a tenant be precluded from applying for a CVA etc. If the intention is that the award is protected from CVA etc the time period should be the period in which the arbitrator has give n the tenant to pay the arrears and it could be more clearly expressed thus removing any interpretational doubt.

34. There does not appear to be any good reason why the Bill precludes the parties from agreeing the revocation of the appointment of the arbitrator . It is a joint decision so neither party can use the process to disadvantage the other and if they are both discontent with the arbitrator the current position simply increases the costs. There should be a simple process whereby an arbitrator can be replaced by agreement or, say the arbitrator becomes ill the parties can agree his resignation and seek the appointment of a replacement.

35. The Bill introduces a new concept for bodies who process applications for the appointment of arbitrators. Whilst we are aware of two bodies have expressed interests in becoming approved arbitration bodies the Bill will impose obligations on them that they do not currently have . T he question arises as to whether they are either able to or wish to oversee the arbitration – clause 8 (1)(e). There is lack of clarity as to what is meant by "oversee" and this is a novel concept in the field of appointment of arbitrators.

Who is protected and who is not

36. There are a number of parties, sectors and scenarios that appear to fall outside the ambit (and protections) of the Bill. For example :-

a. Only landlords and tenants will be able to refer the matter to , or participate in the arbitration and not third parties e.g. guarantors and former tenants who may be pursued by the landlord for arrears and who may end up picking up the tab. It is also unclear whether the issuance of an award will prevent the landlord from pursuing guarantors under the lease, particularly in cases where guarantees have been given by way of indemnity. There are instances where a tenant may not have funds to meet any award and will take advantage of the moratorium period without making a reference to extend his occupation for as long as possible and then simply walk away from the premises knowing that he has insufficient assets to make it worthwhile for a landlord to pursue him. Where there is a guarantor that person has no means by which to reduce his liability in circumstances where the tenant could well have met the tests to be awarded a lower rent.

b. Head-tenants will not be covered . This is difficult to reconcile when many head tenants will be entities whose income derives solely from the rents received from occupational tenants. In circumstances where the occupational tenant’s arrears for a protected period is commuted as a result of arbitration, t hey will also end up picking up the shortfall . Has any research been carried out to understand the potential damage caused to such property owners whose financing of the property is probably largely underpinned by a mortgage?

c. There is doubt as to whether an otherwise qualifying tenant who has sub-let part to another commercial tenant qualifies for protection and if so, what protection?

37. F or all the flexibility built into the scheme , and given to the arbitrators on the question of relief, the scheme application itself is arguably too narrowly drawn.

Peter Bourke, Chair of the Law Reform Committee, Kate Poole and Lauren King

Property Litigation Association

9th December 2021

 

Prepared 14th December 2021