We recently posted an article looking at the shift from alternative to mandatory dispute resolution and commented on the provisions of the Government Guidance on contractual behaviour in the enforcement of contracts impacted by the Covid-19 emergency, which encouraged negotiation and mediation as methods of resolving disputes.
This month, the Government has released its policy statement setting out how rent arrears relating to the pandemic period should be treated. The key points to take from the policy are:
- Arrears relating to the pandemic period will be ring-fenced. The ring-fencing period will depend on the sector in which the tenant is operating and the restrictions which were imposed on that sector. For example, hospitality tenants will benefit from a longer ring-fencing period than office tenants.
- Landlords and tenants will be required to negotiate a settlement in relation to the ring-fenced arrears. Both parties will be required to negotiate in “good faith” in line with the Government Guidance of June 2020. Landlords will be expected to waive or defer a proportion of arrears.
- If no agreement can be reached a mandatory form of arbitration will determine what and when the arrears must be paid. It is unclear how the arbitration framework will operate but proposals include:
- An independent online dispute resolution process. LawtechUK has recently published a feasibility study for an online dispute resolution platform for the recovery of debts. This platform would potentially offer a “one-stop-shop” for various ADR providers in the UK to offer their services to small and medium-sized enterprises. Where settlement cannot be achieved, cases would be referred to an independent adjudication within the platform, with a fast-track enforcement route in the civil courts. The intention is that this process would reduce the burden on the courts.
- A statutory adjudication scheme similar to that used in the construction industry.
- The integration of online dispute resolution into the civil justice process as part of the HMCTS reforms.
- The ring-fencing period will end when restrictions impacting on that industry have been lifted. As all restrictions have now been lifted tenants are required to pay all rent due under their leases going forwards.
Tactical options for landlords and tenants include:
| Landlords | Tenants |
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Negotiate. NB Landlords who wish to consider forfeiture action (as referred to below) should approach negotiations with care/seek legal advice before negotiating. Negotiations are likely to constitute a waiver of the right to forfeit. |
Negotiate. |
| Sue for all outstanding arrears on the basis that legislation for ring-fencing has not yet been introduced. However, landlords should be aware that there may be costs consequences in relation to such action – particularly where there has not been a bona fide attempt to negotiate. |
If pursued for all arrears:
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| Sue for arrears relating to pre-pandemic and/or post lifting of restrictions. | Advise landlord that any rent payments must be allocated to arrears that are unlikely to be ring-fenced. |
| Forfeit for non-monetary breaches. | |
| Forfeit for non-ring fenced arrears after 25 March 2022. | |
| Serve a statutory demand/winding-up petition after 30 September 2021. |
In summary, it is clear that landlords and tenants are expected to work together to resolve rent arrears disputes without recourse to the court process. A failure to do so is likely to involve significant costs penalties. That said, tenants are expected to meet rental liabilities going forwards given that all restrictions have now been lifted.
Here to help
If you would like more information regarding alternative dispute resolution and pandemic rent arrears and how we can help, you can get in touch with our Property Litigation Team on 0161 941 4000 or email the Property Litigation Team.