UK government releases draft working guidelines for arbitrators under COVID-19 Arrears Arbitration Scheme | Hogan Lovells
The Commercial Rents (Coronavirus) Bill is currently pending in the House of Lords. It is expected to reach final stages imminently and come into force around March 25, 2022. Once the bill is passed, it launches an unprecedented arbitration program to deal with COVID-19 commercial rent arrears that remain unpaid. and in litigation. For a period of six months, unless extended, a party to a commercial lease may submit any protected rent debt to arbitration and the arbitrator has the power to award relief from such debt, including cancellation by whole or in part or to defer payment for up to 24 months.
The bill was published on November 9, 2021 and was accompanied by a new “Code of Practice for Commercial Property Relations following the COVID-19 Pandemic”. Now the government has issued working draft guidelines specifically for the arbitrators who will administer this new regime. Much of the guidance explains how the scheme works and is written assuming the bill has already passed.
Not only is the regime unprecedented in granting arbitrators the power to effectively override lease obligations and judgments rendered in proceedings rendered after November 10, 2021, but it will also be significantly different from the usual form of arbitral proceedings involving declarations and declarations. witness/expert evidence. Instead, the arbitrator will rely on the parties’ formal submissions and supporting evidence to make their decision. To the extent that there is any inconsistency between the Scheme and the Arbitration Act 1996, with which arbitrators will be very familiar, the guidelines confirm that the Scheme will prevail.
The guide divides the program into 3 steps:
Stage 1 (the pre-arbitration stage)
The parties must comply with requirements such as notifying the other party of their intention to sue the other party, waiting for the expiration of the prescribed period and then sueing an arbitration proceeding from an approved list (which will be published on gov.uk in due course).
The bill clarifies that the scheme is not open to a tenant who has compromised a protected rent debt via a CVA, IVA or a scheme of arrangement, but the guidelines do not prohibit a tenant from seizing a body arbitration for such debts. while a CVA, IVA or plan of arrangement is in progress. Instead, it states that an arbitrator cannot be appointed and no formal proposal can be submitted while a decision is pending. This allows tenants to make a reference to protect their right to access the scheme while a decision is pending, but it adds administrative burden for arbitration bodies to check whether a CVA, IVA or settlement plan arrangement was proposed.
The parties may agree on the number of arbitrators to form the tribunal without any limit on the number. Generally, and failing agreement between the parties, a sole arbitrator will be appointed.
Stage 2 (the eligibility stage)
The guidelines make it clear that the arbitrator must determine whether the dispute is eligible for the regime, which requires familiarity with the definitions of key terms in the bill. These include:
• “commercial rentals” – if the rental in question is not a commercial rental, the arbitrator must make an award dismissing the dismissal. The guidelines state that “a commercial tenancy is one to which Part 2 of the Landlords and Tenants Act  applies. That is, a tenancy consisting of property which is or includes premises occupied by the tenant for business purposes, or for business and other purposes. case law relating to the notions of occupation and professional object.
• The scheme applies to a “protected rent debt”, which is a claim for unpaid “rent” under a professional lease which has been “negatively affected by the coronavirus”, and where this rent is attributable to a occupation during a “protected period”. Each of these terms has prescribed meanings under the Scheme and a reference to arbitration will only be admissible if it satisfies all of them and has not already been agreed between the parties.
• “Tenant’s business viability” the arbitrator must assess the tenant’s business as viable, or would be viable with relief from payment of the protected rent debt, to be eligible for the scheme. This concept is particularly tricky, but it underlies the whole scheme. The guidance acknowledges that “viability is deliberately not specifically defined, in order to take into account the wide range of different business models both within and between sectors… Viable business models will differ from party to party and from sector to sector. For example, the arbitrator may wish to keep in mind that profit margins can vary significantly across industries and sectors. The Act and these Guidelines therefore do not provide a fixed definition of viability. However, guidance is provided on a range of tools and processes that will be useful for arbitrators to consider to assess viability at the appropriate time.” These tips include:
o Bank account information, gross profit margin and/or net profit margin may be the most useful indicators of whether the tenant’s business is viable;
o A review of net profit margin or gross profit margin prior to March 2020 versus the end of the protected period can be helpful in providing a clearer picture of viability;
o Some businesses may not quickly return to the same pre-COVID level of profitability;
o Small businesses may find it more difficult to provide forecasts of their future profitability or may not have detailed financial records compared to a large business.
o Where earnings forecasts are provided, the arbitrator should consider how reliable the future earnings forecast is, taking into account the context in which the business operates and whether any current or expected market factors could make the forecast difficult future profitability. For example, the rate of inflation may be a factor to consider.
o The balance sheet may appear to show that a business is able to meet its obligations, but it does not necessarily show that the business is profitable. Therefore, gross profit margin and net profit margin are likely to be more informative as a measure of profitability in determining viability.
The arbitrator will most likely not have specific experience with the tenant’s business or industry, but should use the information provided by the tenant (and request any additional information they deem useful) to bring judgment on viability.
Step 3 (resolution of payment exemption issue)
Having already assessed the viability of the tenant at stage 2, the arbitrator is required to consider the viability of the tenant again at this stage but the focus is on the extent to which the tenant can pay a protected rent debt taking into account, on the one hand, the viability of the business of the tenant and, on the other hand, the solvency of the owner. A landlord does not have to provide evidence of his creditworthiness unless relief from payment of the protected rent debt threatens that creditworthiness.
At this point, the arbitrator is required to decide which of the parties’ final offers best conforms to the principle that:
(a) the award should aim to preserve or restore and preserve the viability of the tenant’s business to the extent consistent with the preservation of the solvency of the landlord; and
(b) the tenant should, to the extent consistent with (a), be required to meet its obligations to pay the protected rental debt in full and without delay.
It seems clear that this is intended to dissuade parties from adopting extreme positions. Only if neither party has submitted a proposal that complies with this principle can the arbitrator render an award that he deems appropriate to respect the principle.
The arbitration award is open to the public, but confidential information must be excluded unless the party consents to its inclusion. “Confidential information” includes information relating to a party or any other person which, if disclosed, would or may materially harm the legitimate business interests of that person. This is designed to protect both parties but can create tension for an arbitrator who must justify any finding that the tenant’s business is not viable and set out their reasoning in their award.
The guidelines state that an award of relief from the payment of a judgment debt ordered after November 10, 2021 modifies that judgment debt. It is unclear how this modification would occur in practice. For example, is there an automatic update or power to request an amendment to the Register of Judgments, Orders and Fines?
The draft guidelines come with a clear disclaimer that they are considered an incomplete draft and are being released now to allow stakeholders to develop them further before the program takes effect. The final guidelines will be published after the bill receives Royal Assent, but at this stage they provide valuable insight into how the system is meant to work in practice and the challenges referees will face.