Rent arbitration scheme risks ‘two-tier system'

Leading property experts have warned the new law designed to resolve outstanding Covid-related commercial rent debts could create an unlevel playing field for hospitality businesses.

Under new legislation, businesses that were subject to compulsory closure by coronavirus regulations and accrued arrears during the restricted period, have an additional six months protection for Covid-related debt.

The Commercial Rent (Coronavirus) Act 2022, which was introduced following the end of the lease forfeiture moratorium last week, means eligible tenants or landlords who failed to reach an agreement can now enter a legally binding arbitration process.

But one leasing property expert believes the measures are “not substantial enough”.

David Abramson, CEO of lease restructuring specialists Cedar Dean, believes the “uncertainty of
not knowing what’s going to happen” could make the process “a waste of time”.

“If people are really in trouble, they’ll do a liquidation or administration, they’ll do an insolvency process,” he tells MCA.

“Arbitration only relates if you didn’t pay your rent. What about if you were a small business that took loans out to pay your rent? Well, you can’t get that money back, it’s not going to help you.”

According to guidance from law and tax advisory firm CMS, the arbitrator will look at the tenant’s business and decide upon gateway questions of viability, affordability and landlord solvency.

If the tenant can afford to pay in full it must pay; if the tenant’s business is not ultimately viable it is not eligible at all; and if an award would make the landlord insolvent, it should not be made.

An award can be made based on the following scenarios: a full or partial write off, deferral of the debt on terms of up to 24 months, or nil concession.

Adam Coffer is chairman of the Property Owners Forum, which represents more than 300 landlords, and also the managing director of specialist leisure and retail estate investor EPF Group.

He says the Government has been “vague on who the arbitrators will be, costs and, most crucially, group ownership structures”.

An arbitrator’s decision, Coffer insists, must consider financial viability for both parties.

He cites the example of a tenant operating under a lease through an SPV [special purpose vehicle] or subsidiary, which is owned through venture capital or PE-backed giants with “more money than the Queen”.

By contrast, he says, a property owner “has to do all the hard work to demonstrate their own financial disadvantage.”

“I think it’s a burden on small operators, tenants and property owners alike if they’re faced by a counterparty who is of very significant means, who could throw thousands of pounds at the forensic detail needed to be put forward their case. That will also deter people.”

The Government has reiterated the arbitration scheme should only be used as a last resort and urges landlords and tenants to keep working together to reach their own agreements where possible using its Code of Practice.

Tenants who can repay their rent debts in full should do so and, when they cannot, landlords should try to share the burden, “so we can all move on”, business minister Paul Scully insists.

While it is not clear who the arbitrators will be, CMS states that the tenant, as the likely applicant,
would be required to pay the arbitrator’s fee upfront.

Victoria Oates, director of professional services at Shelley Sandzer warns that some tenants who have already accrued substantial debts may be “loathe to incur more”.

“The Act will convey a huge amount of power on an arbitrator to determine the outcome of the debt,” she tells MCA.

“For individuals receiving income from a commercial property (rent) or a single occupier – their livelihood and income will be in the hands of an arbitrator.

“Before Covid hit we had already seen a significant restructuring in the casual dining sector. A number of the large groups had already gone through CVA or administration – thus wiping the slate clean and clearing the decks of the ‘old debt’.

“There will therefore for some time to come before a two-tier market of those saddled with old
debt/repayment plans and those who had managed to start afresh.”

Stephen Owens, managing director, pubs & restaurants at Christie & Co says that while it was too early to say how the system would work in practice, principles or approaches that emerge from the first few arbitrations might ultimately help landlords and tenants find agreements.

“If they see how the arbitration system’s working, they might be able to pick up themes from that which may enable them to reach and negotiate a settlement,” Owens adds This collaboration is exactly what Coffer has been championing for from the outset.

“One of the real positives to come out of this is that by far the majority of landlord/tenant relationships have been cemented further through a need to engage and seek symbiotic, mutually viable solutions,” he says.

“I believe there is a better understanding from the majority of landlords and tenants, that property ownership is symbiotic; one of the crucial factors has been trying to break down the demonisation of landlords as cigar-chomping, pin-striped barons and rather explain that every man and woman in the country is a property owner—through our pensions, charities, local authorities and beyond.”

What remains, Coffer believes, is a “minority of unscrupulous tenant groups” and “aggressive property owners”.

“The majority of outstanding rent will have or will continue to be dealt with through collaboration and dialogue and we would encourage that between landlords and tenants.

“What we’re left with are just the unscrupulous players on both sides - landlords and tenants who simply will not engage with each other. That is more of a reflection of a breakdown in relationships than a system or market.

“I think the Government has been very slow to address this issue and very slow to recognise the demonisation of landlords was what should have been deterred right from the beginning.”

Coffer envisages the majority of arrears will be resolved directly. “It is a costly and time-consuming process for a small property owner or independent retailer/leisure operator,” he adds.

Margaret Walsh, the head of lease advisory team at Davis Coffer Lyons agrees.

“The one thing about arbitration is that there’s always going to be one party who’s extremely dissatisfied with the outcome and one thing that may help is supporting people to focus on resolving disputes with negotiation settlements, rather than moving to the worst-case scenario last resort remedy.

“The other thing is we don’t know how it’s going to work in practice, we don’t know what the cost is
really going to be.”