Lawbite: Third award published in covid rent arbitration scheme

• United Kingdom

• Real estate
• Real estate dispute resolution
• Real estate litigation - LawBite

30-08-2022

KXDNA Limited and 60 SA Limited, arbitrator: Stephanie Tozer QC of Falcon Chambers Arbitration (arbitration pursuant to the Commercial Rent (Coronavirus) Act 2022)

As we approach the end of the commercial rent arbitration scheme a third substantive award has been published under the scheme, again by Falcon Chambers Arbitration. This decision indicates how arbitrators assess parties’ proposals within the scheme introduced by the Commercial Rent (Coronavirus) Act 2022 (Act), and may have an impact on the negotiations and proposals made within the coming last few weeks of the scheme.

The tenant made the referral regarding £1,805,820.30 in rent arrears and interest owed under two leases of premises at Sloane Avenue, London. The applicant tenant’s formal proposal sought a release from all of the rent debt, save for £407,000 which it proposed to pay by instalments. The respondent landlord’s proposal was that the tenant pay £1,023,284 in instalments, with the balance written off by way of debt relief.

The arbitrator first determined that she did not have to satisfy herself on matters the parties had already agreed, namely:

• that the tenant’s business was viable (in accordance with section 13(2) of the Act)
• that the rent in question was Protected Rent Debt as defined, and
• that the only issue to be determined was the rent relief, if any, to be granted.

The Arbitration Act allowed parties to agree what they could before the matter was subjected to arbitration, and the statutory guidance issued in relation to the scheme also encouraged parties to agree what they could.

The arbitrator commented, however, that in the absence of such agreement, she would have had real doubts on the tenant viability and Protected Rent Debt points in this instance. This was because the parties had assessed the “business of the tenant” based on the business operated by the group of companies of which the tenant forms part, and not of the tenant named on the lease (and applicant) which is a dormant company. The party that operates the business from the property in question and pays the rent is a company associated with the applicant, and within the same group.

The issue remaining between the parties was how much and over what period any rent should be paid, consistent with maintaining the viability of the business. The question of viability in this context is distinct from the issue of solvency, and the key focus is whether the business is sustainable in the future.

In reaching her decision on the award, the arbitrator first determined a range of awards which could satisfy the requirements of s.15 of the Act, and then assessed whether any of the parties’ formal proposals met the requirements of that section. The arbitrator’s interpretation of the legislation was that if one of the proposals was between the minimum and maximum, it had to be accepted: only if neither was within the range of figures consistent with s.15 was the arbitrator to determine her own figure.

The arbitrator considered detailed and fact-specific arguments about forecasted income and capital expenditure allowances and their effect on the tenant’s ability to pay in full. In relation to capex, the arbitrator found that ‘it is appropriate to expect [the tenant] to tighten its belt as regards capital expenditure from pre-pandemic levels, if it is asking the Respondent landlord to bear a rent concession’.  An allegation that an inter-company loan had been made deliberately to maximise the benefit of the scheme was dismissed as there had been no evidence or hearing on this point.

Only the respondent landlord’s figures fell within the range and as such the award reflected its proposal as to the rent relief granted and instalments over a 24 month period.

• it is interesting to see that the arbitrator appeared to be of the view that viability should be based on the tenant’s business and not that of the group of which it forms part. In this case, the parties had agreed the pre-conditions, so the arbitrator had no decision to make on this issue. In another case, the arbitrator may well not take into account group companies when assessing viability
• the parties are to each pay half the arbitration fee, in line with the expectation in s.19 of the Act. The respondent’s alleged unreasonable conduct was disregarded where it came to cost due the fact that the respondent effectively won with its successful proposal