The government's flagship COVID rent arrears arbitration scheme has been "chronically" underused by landlords and tenants but experts say it has worked in practice and is set to be the template for a major overhaul of lease renewals under the 1954 Landlord and Tenant Act.
This month marks a year since the scheme came into effect and six months since the September 24 2022 final deadline for new applications. There will be no extension of a scheme and that no more appeals can be made, it has been confirmed.
According to a review conducted by law firm DAC Beachcroft, awards are continuing to be decided with at least 13 so far this year, six of which were published in February. It says 54 awards have now been published by various scheme providers.
There was very little take-up in the first months of the scheme's launch. CoStar News reported in August 2022 that, according to a Property Litigation Association poll, only 5% of 242 property litigators polled had been instructed to make a referral under the scheme, a huge drop on the circa 7,500 referrals that the government was expecting.
But there were a number of last-minute applications in the run-up to the 2022 deadline.
Dellah Gilbert, chair of the Property Litigation Association and partner at Maples Teesdale, says the fact that there have been 54 written awards since July 2022 is "testament to the tight timetable that government prescribed to resolve these long outstanding disputes".
Gilbert said each award is based on its own facts, so precedent is likely to be thin on the ground. But she points out that the final awards have not been as generous to tenants as they might have hoped, "partly perhaps because a tenant’s viability and ability to pay is judged as at the date of the award and not backdated to the COVID period".
Legal experts say the scheme has been "chronically underused" given government and industry expectations, particularly as the projected backlog of rent payments that built up during the pandemic was some £8 billion, according to Remit Consulting.
In addition, the expected outcome, a detailed analysis of what a viable business is, has not emerged.
One expert said: "There have not really been any clear cases in this regard as appeals have mainly be on a property-by-property basis rather than at a corporate level. Also by the time cases have got to the arbitrator businesses have often been in a lot better place, so it has not focused on whether it was viable during the depths of the pandemic but how it is performing now."
There is consensus, though, that the process did work on a functional level and legal experts have told CoStar News that the government is reviewing how it could be used as template for its promised root-and-branch overhaul of the 1954 Landlord and Tenant Act.
The Landlord and Tenant Act 1954 was created to provide security of tenure for business tenants. In December 2020 the government said a major review of the Act would be conducted by the Law Commission and would examine how landlords and their tenants can better collaborate. It would consider how the lease process can be reviewed and improved to ensure high streets thrive as the country emerges from the COVID pandemic and would likely cover rents, lease models and forfeiture.
One party close to the review said: "One area the government is interested in is how lease renewals might be taken out of the Court system. It has seen that using something similar to the COVID arbitration system would make resolving lease renewal conflicts a private process rather than seeing them bogged down in the County Courts, and there is clear merit in this."
The PLA's Gilbert thinks there should still be a relatively large number of awards published.
“Most applicants really did leave it until the 11th hour to make their applications, perhaps reflecting the government’s guidance that arbitration should be a last resort. This has resulted in some delays to the processing of applications and appointment of an arbitrator. Therefore, we can expect to see quite a few more awards in the months to come."
And DAC Beachcroft writes that among the 54 awards a number of common themes have emerged, underlining how it has been able to work.
It says most awards have come from references made by tenants and that strict compliance with the process was essential. Some references were dismissed as a result of a failure to follow the specific requirements when it came to submitting a formal proposal along with each reference.
It adds that if a tenant was viable and could afford to repay its debts – with assessments as to affordability being made at the time of the decision, and not necessarily at the time of the COVID lockdowns – then it is clear it has not received any automatic right of relief via the scheme. Several awards have determined that tenants be given no relief on that basis and that the debts should be paid in full.
But it says where some relief was needed, those landlords that worked on a proposal benefited.
Chloe Postlethwaite at DAC Beachcroft writes: "In some cases, for example, those landlords who were prepared to accept some waiver or deferred payment plan typically found favour; whereas tenant proposals that asked for too much relief relative to their affordability were deemed to not be consistent with the Commmercial Rents (Coronavirus) Act principles."
Postlethwaite writes that where no agreement could be reached a common approach has been to award relief in the form of a circa 50% rent waiver and circa six to 12 month deferred repayment plan for the balance.
Parties who failed to properly take part in the process were penalised. One tenant was ordered to pay 100% of the arbitrator’s fees.
Postlethwaite suggests there will probably be more awards being published in the coming weeks before the scheme "finally peters out".
She describes it as "undoubtedly" a useful model for those tenants who have faced uncooperative landlords and who have genuinely needed support. But she concludes COVID arrears will already be a thing of the past for many landlords and tenants, and take-up in the scheme has been nowhere near on the scale expected.
The Commercial Rent (Coronavirus) Act provided for the legally binding arbitration process with the six-month window to apply for arbitration ending on 24 September of 2022.
Matthew Ditchburn,, Partner at Hogan Lovells and former chair of the PLA, previously told CoStar News the reasons the scheme has been underused are a matter of speculation, but overall he felt landlords and tenants had been turned off by the uncertainties in the process, as well as the cost and drain on management time that it involves.
He said it was unlikely the low take-up in numbers meant that there were very few COVID-19 rent arrears left.
There had been a view that many tenants had been awaiting the outcome of a Court of Appeal judgment handed down at the end of July 2022 in the 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.