The government's arbitration process for outstanding commercial rent debts accrued because of the pandemic has been barely used with only weeks until it is wound up, according to exclusive figures provided to CoStar News by the Property Litigation Association.
The disappointing take-up of the process raises a number of questions, not least will the government decide to extend the deadline for use, and what happens to the billions of pounds of rent still estimated to be outstanding?
The Commercial Rent (Coronavirus) Act provided for the legally binding process with the six-month window to apply for arbitration ending on 24 September of this year.
The Property Litigation Association, which represents about 1,500 specialist property litigation solicitors throughout the UK, has surveyed arbitration bodies in England and Wales.
According to the Financial Times, government had been expecting around 7,500 cases to go to arbitration.
The PLA said 95% of the 242 polled have not made any referrals so far under the Act. Only 11 bodies have made at least one referral, with 36% of them having made between two and five referrals.
Half of the respondents who have made the referrals have done so mainly or entirely for landlords, while the other half have acted mainly or entirely)for tenants. No one made referrals for a mixture of landlords and tenants.
Mathew Ditchburn, chair of the Property Litigation Association, says the reasons the scheme appears so chronically underused are a matter of speculation, but overall he thinks landlords and tenants have been turned off by the uncertainties in the process, as well as the cost and drain on management time that it involves.
"There remains little guidance on how arbitrators would apply the test for viability in practice, and it is not an attractive proposition for occupiers to have to argue, in a public forum, that their business is unviable unless the arbitrator writes down or defers some or all of the rent arrears. Property owners may simply prefer to pursue a negotiated commercial solution, or they may be waiting to see if the tenant misses the deadline for making a referral, in which case the property owner can enforce the rent arrears in the usual way," said Ditchburn, who is also a partner at Hogan Lovells.
The projected backlog of rent payments that built up during the pandemic is some £8 billion of rent payment, according to British Property Federation-backed figures from Remit Consulting.
Ditchburn says it is unlikely the low take-up in numbers means that there are very few COVID-19 rent arrears left.
"It’s true that lots of property owners and their tenants have negotiated solutions, which will have brought the figure down substantially. But, anecdotally at least, there remains a rump of tenants that can’t or won’t pay, because they don’t have the funds or because objections remain to the principle of paying rent for periods when they couldn’t trade. Quite possibly, tenants have been awaiting the outcome of the Court of Appeal judgment handed down at the end of July in relation to whether rent is payable at all for periods during which the tenant was prevented from trading due to lockdown restrictions. If so, that hope has now receded, as the court has confirmed that the rent is indeed payable, and so paying up, negotiating or making a referral to arbitration may be the only options remaining."
Ditchburn is referring to the recent cases of London Trocadero and Bank of New York Mellon against cinema chains Picturehouse Cinemas and Cine-UK which came down entirely in favour of the landlord.
In addition, one of the rare cases to go to arbitration ordered the jewellery giant, Signet (owner of H Samuel), to pay its landlord £450,000 in rental arrears on its headquarters building, having unsuccessfully argued that it should have been subject to the same exemptions as its retail portfolio during the pandemic.
The arbitration scheme is due to end on 24 September, meaning that no further referrals from that date will be possible.
Ditchburn says that date is subject to possible extension by government, but it is thought unlikely that it will be extended.
"More likely, the government will want the market to move on, and occupiers will have little cause for complaint if they had six months to make a referral but chose not to. There may be a last-minute flurry to beat the deadline but tenants shouldn’t leave it too late because they first have to notify the property owner and then to wait for a response, which could mean a delay of up to 28 days before they can make a referral.”