Rent arrears at a retailer's HQ are not a protected rent debt: landmark arbitration award under the UK Coronavirus Commercial Rent Arrears scheme as deadline looms closer
A statutory arbitration scheme for the resolution of commercial rent arrears that accrued during periods of government mandated closures in response to the pandemic came into force on 24 March 2022 under the Commercial Rent (Coronavirus) Act 2022 (the 2022 Act). The ground-breaking scheme is mandatory and binding once a dispute has been referred to one of the seven approved arbitration bodies.
On 11 July 2022, Falcon Chambers Arbitration (one of the seven approved bodies whose members may act as arbitrators) published the first known arbitration award under the scheme in Signet Trading Limited v Fprop Offices (Nominee) 4 Limited and Fprop Offices (Nominee) 5 Limited. At 19 pages longs and made by Gary Cowen QC, the award dismissed the reference by Signet Trading Limited, more commonly known as the H Samuel chain of jewellers, as there was no protected rent debt under scheme. The background to the scheme, when it may be used, and the procedural requirements of the arbitration are discussed in detail in our earlier blogs here and here.
Under the 2022 Act, "a protected rent debt" is a debt under a business tenancy where the tenancy was adversely affected by coronavirus, and the unpaid rent is attributable to a protected period. Section 4 of the 2022 Act explains that "adversely affected by coronavirus" means that:
- the whole or part of the business carried on by the tenant at or from the premises comprised in the tenancy, or
- the whole or part of those premises
was of a description subject to a closure requirement (ie a requirement imposed by regulations to close all or part of a business or premises).
Signet had accrued rent arrears of almost £450,000 in relation to their office headquarters in Hertfordshire, where only two members of staff remained working during the pandemic (a security guard and a post-room worker). They argued that whilst offices were not premises of a description required to close by the restrictions, the purpose of their office was merely to support the retail business which was required to close. They described the office is an ancillary part of the retail business. Therefore, they alleged that their business was adversely affected even though it does not operate from the specific premises where rent arrears had accrued.
However, the arbitrator was not swayed. He summarised "the key question, then, is whether a closure requirement applies to the business carried on by the Applicant from these specific premises". Whilst the indirect effect of the Covid restrictions was that many offices remained largely empty, they were not in fact premises subject to a closure requirement and so the rent arrears cannot be a protected rent debt. The reference was dismissed with a provisional ruling that Signet should pay for the landlord's costs of the reference.
If Signet had been successful in this argument, it may have opened the floodgates for references from tenants of offices, creating an arbitrary two-tier system of office tenancies. On the one hand, offices occupied by tenants whose principal business was retail or hospitality might have been entitled to relief from rent arrears, whilst office tenants unconnected to a retail business would have fallen outside of the scheme.
Arbitral awards issued under the scheme are final and binding. They can only be challenged under section 67 (lack of substantive jurisdiction) and section 68 (serious procedural irregularity and as modified by the 2022 Act) of the Arbitration Act 1996 and appealed on a point of law under section 69 of that Act. The scope for appeal is therefore limited, but we may expect some tenants to pursue their claims further.
The award provides welcome clarity on the application of the scheme in practice and will be particularly well-received by landlords of office premises occupied by retail or hospitality businesses.
The deadline to refer a dispute for arbitration under the 2022 Act is 23 September 2022 and there are no murmurs of an extension to the scheme at this stage. As the applicant first needs to give notice to the other party of their intention to refer the matter to arbitration and allow 28 days to pass before making the reference, any party interested in using the scheme would be well-advised to act by mid-August.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
