Arrears arbitration process will require both landlords and tenants to pull together

Arrears arbitration process will require both landlords and tenants to pull together

Confirmation of a nine-month extension to the commercial rent moratorium to 25 March 2022 has come as a double-edged sword - broadly welcomed by tenants, but prompting further frustration amongst under-pressure landlords who, by the time the moratorium ends, will have been prevented from collecting arrears for two years.

The silver lining is that this significant time extension is to allow for an arbitration process to be established between tenants and landlords, which will be entered into by both parties and be legally binding if a commercial agreement on the repayment of arrears cannot otherwise be reached.

Many commercial tenants, particularly in the retail and leisure sectors, have used the rent moratorium to reduce cash outgoings during the COVID-19 pandemic. This, combined with other Government initiatives such as business rates relief and the Coronavirus Job Retention Scheme, has acted as a vital lifeline for many operators within sectors most heavily impacted by enforced closures and social distancing measures.

In order to ensure landlords are protected, the government is making clear that businesses who are able to pay rent, must do so. Tenants should start paying their rent as soon as restrictions change, and they are given the green light to open.

Steve Absolom, Head of Real Estate at Interpath Advisory, comments: “The creation of a legally-binding arbitration process is a welcome development and, in the absence of initial agreement, should help landlords and tenants arrive at a commercially acceptable and pragmatic compromise.

“However, it’s unclear at this early stage how many cases will need to be heard by the arbiter and the attitude they will take towards both sides in the event of a dispute, which for now creates further unwelcome uncertainty.

“We’d therefore advise both sides to enter into pre-arbitration discussions in good faith and seek a fair commercial settlement in the first instance. Appointing an independent party to review proposals and test existing covenants may be a way of building confidence into the process, and may help find an agreement that both sides find acceptable and sustainable.

“The reality is that it will still take some time for the financial legacy of COVID-19 to be worked through, and so it’s vital that landlords, tenants and other financial stakeholders work together to create consensual solutions.”

Scott Marriott, a chartered surveyor and associate director at Interpath Advisory, added, “Tenants that are able to trade should pay their rent and service charges invoices; this income stream will be very welcome by landlords, helping to meet their ongoing financial liabilities to a wide range of stakeholders, as well as building goodwill.”