The CRCA provides a regime under which business tenants who were adversely affected by COVID-19 to the extent that their premises or business was required under regulations to close during the period between March 2020 and July 2021, can seek relief from their rent obligations in respect of that period (the "protected rent debt"). The relief might take the form of a reduction in the amount of the debt payable, or a payment plan for up to 24 months, or a combination of the two.
This arbitration arose following the landlord’s referral. The Arbitrator, having determined that the eligibility criteria had been satisfied, considered the final proposals for payment put forward by the parties.
The amount of the protected rent debt
The amount of the protected rent debt calculated by the landlord was £111,233.97 (which included interest). In a revised formal proposal the landlord stated that the tenant had made a payment towards the debt owed in the sum of £28,233.97 and stated that the debt had been reduced to £80,000. The Arbitrator noted that such a payment would have reduced the debt owed to £83,000 and not £80,000, but as the tenant had not sought to dispute the figures, the Arbitrator concluded that the protected rent debt in question was £80,000. So, remember to ensure that final calculations are correct!
The proposals
The landlord’s proposal was for the tenant to pay the protected rent debt in full, by way of a deferred payment schedule over the course of 12 months. The tenant’s proposal was for the protected rent debt to be reduced by 50% and for the reduced amount to be payable immediately.
The guiding principles
The CRCA provides that “Where an award … gives the tenant time to pay an amount (including an instalment), the payment date must be within the period of 24 months beginning with the day after the day on which the award is made”.
The arbitrator’s principles set out in the CRCA provide that
• any award should be aimed at preserving, or restoring and preserving, the viability of the business of the tenant, so far as that is consistent with preserving the landlord’s solvency.
• The tenant should, so far as it is consistent with the principle above to do so, be required to meet its obligations as regards the payment of protected rent in full and without delay.
Under this regime, if both parties’ final proposals are consistent with the principles set out above, the arbitrator is required to make the award according to whichever proposal the arbitrator considers to be the most consistent. But if one proposal is consistent with the principles and the other is not, then the arbitrator is obliged to make the award set out in the proposal that is consistent. Where neither is consistent with the principles the arbitrator must make whatever award they consider appropriate.
The Award
Having considered the evidence, which the Arbitrator noted was very limited, comprising only the tenant’s filed accounts for 2019 and 2020 together with a statement of the annual profit and loss for each restaurant in the chain, the Arbitrator considered both parties' proposals by reference to the principles set out above.
The Arbitrator concluded that the tenant was able to pay the protected rent debt in full, meaning that its proposal to pay only 50% of the protected rent debt was not consistent with the second principle. Although the tenant’s business had clearly been adversely affected by COVID-19, their most recent filed accounts contained a statement by its directors that the company was able to meet its liabilities as they fell due for at least 12 months. And no financial information had been provided for the period after 3 January 2020, or evidence post-dating the directors' robust statement. In contrast, giving the tenant more time to pay (i.e. by way of instalments as proposed by the landlord) would assist in preserving the tenant’s viability. The Arbitrator considered that the landlord’s proposal was consistent with both of the principles set out above. As such, the award was made pursuant to the landlord’s proposal.
Lessons and take-aways
This award demonstrates very clearly the parameters within which arbitrators are required to operate under the CRCA scheme. Central to the scheme is the process of identifying whether the parties' proposals comply with the over-arching principles set out in set out in the Act. Where one proposal complies and the other doesn't, the arbitrator has no choice but to make an award in line with the compliant proposal. A tenant putting together a formal proposal must be able to persuade the arbitrator that its terms are appropriate to restoring and preserving its viability, and that there is a sound reason for it not to pay the full amount immediately. Finally, as seen in this case, a proposal which involves a significant reduction in the protected rent debt could come unstuck where the company has been publishing robust and confident financial statements about its future.
Authored by Amy Dunn and Tim Reid.
