Grand Committee

Thursday 27th January 2022 Grand Committee

Thursday 27 January 2022

Arrangement of Business

Thursday 27th January 2022 Grand Committee

Announcement

13:00

[The Deputy Chairman of Committees (Lord Rogan) (UUP)]

My Lords, members are encouraged to leave some distance between themselves and others and to wear a face covering when not speaking. If there is a Division in the Chamber while we are sitting, this Committee will adjourn as soon as the Division bells are rung and resume after 10 minutes.

Commercial Rent (Coronavirus) Bill

2nd reading
Thursday 27th January 2022 Grand Committee

Debate before Second Reading

13:01

Moved by

[Lord Grimstone of Boscobel]

That the Grand Committee do consider the Commercial Rent (Coronavirus) Bill before Second Reading.

[The Minister of State, Department for Business, Energy and Industrial Strategy and Department for International Trade (Lord Grimstone of Boscobel) (Con)]

My Lords, it is an honour to open this debate on an important piece of legislation. The primary purpose of this Bill is to support commercial tenants and landlords in resolving outstanding rent debt accrued during the Covid-19 pandemic.

As noble Lords know, the pandemic has brought forward unprecedented challenges. Many difficult decisions have been made in the interest of protecting public health, including the mandated closure of businesses. These closures have had immense impacts across the economy. Sectors such as hospitality, leisure and non-essential retail have been subject to significant restrictions and closures. Certain businesses, particularly in the night-time economy, were mandated to close for over 15 consecutive months.

Minimising the economic damage caused by the pandemic has been a key aim for this Government. To that end, the Government put in place an economic package of support which provided businesses and individuals with certainty. Since the start of the pandemic, the cumulative cost to the Government has been £400 billion. Measures introduced include loan schemes, grant funding, tax deferrals and the Coronavirus Job Retention Scheme, all of which were designed to be accessible to businesses in most sectors and across the UK.

The Government also introduced several temporary measures that have helped commercial tenants. These measures have prevented the eviction of commercial tenants based on unpaid rent, restricted landlords’ ability to seize goods to recover rent owed, and restricted landlords and other creditors from instigating certain insolvency proceedings. These protections have been in place since March 2020 and have been extended to late March 2022 in order to allow time for Parliament to consider the legislation before us. While the protections have succeeded in their aim of minimising insolvencies and job losses, they have also led to commercial tenants building up a significant amount of unpaid rent debt. An estimated £6.97 billion in rent was deferred over the course of the pandemic.

The Government have therefore worked alongside tenants and landlords to develop a code of practice for the commercial property sector. That code was published in June 2020 to support rental negotiations amidst these temporary measures. Of course, it has always been the Government’s preference that landlords and tenants negotiate and come to agreements on rent independently and openly. An updated version of the code was published alongside the Bill’s introduction to the other place, and it has been really encouraging to see that many landlords and tenants have used the code to reach settlements.

As was heard in the oral evidence sessions in the other place, the anticipation of this Bill coming into force has encouraged even more landlords and tenants to come to an agreement. However, there are still tenants and landlords who have been unable to reach agreement. It is estimated that by March 2022 there will still be more than £1.5 billion in deferred rent that will not have been agreed on. As such, multiple businesses and jobs continue to face the threat of insolvency as a result of this rent debt. Without this Bill in place, the measures protecting tenants will expire before the end of March, leaving commercial tenants in the sectors covered by the legislation vulnerable to evictions and insolvency proceedings.

Importantly, the Bill is not one-sided. Landlords, too, have also incurred significant financial losses as a result of the pandemic. We are aware of several high-profile tenants who have refused to pay rent despite being able to do so, and many landlords have been unable to recover rent from—let us describe them as “reticent”—tenants. Through this Bill, the Government seek to support commercial tenants who were required to close, and their landlords. This will ultimately allow the commercial property sector to transition away from these temporary measures and return to normal market conditions.

I shall give a quick overview of the Bill. It introduces a system of binding arbitration that will act as a backstop for certain tenants and landlords who have been unable to come to an agreement on outstanding rent debt. We initially estimated that around 50,000 firms would be eligible for the arbitration scheme; this number excludes parties that have already reached agreement. However, it is very positive that it is now estimated that of those 50,000 firms, only around 7,500 cases are left that will go through the arbitration scheme. We will continue to encourage parties to negotiate in the first instance wherever possible. I should stress that it is important to note that these figures are only estimations, as outlined in the impact assessment that was published alongside the introduction of the Bill.

The introductory provisions of the Bill are set out in Clauses 1 to 6. These include the definition of rent debt, the businesses that are in scope for arbitration and the specific period in respect of which rent debt is protected. The decision to apply the Bill to businesses that were mandated to close ensures that this support is targeted to those that require it most. These businesses are among those hardest hit by the pandemic. Although they have been able to resume trading without restrictions, many of them have historically low profit margins and minimal cash reserves.

To show the extent of the problem, during the first period of restrictions, the average rent collection dropped to around 38% at the due date, and 51% at seven days past the due date. The lowest collection rates were seen in leisure and retail, which had rates of 26% and 46% respectively at seven days past the due date. By quarter 4 of 2021, these rates had risen. Rent collection had improved to 61% for the leisure sector, up from 26%, and 70% for retail, up from 46%, at seven days past the due date. I am reassured that businesses are showing signs of recovery. However, expecting businesses to be able to pay rent debt accumulated over the pandemic in a one-off payment would in many cases be unreasonable.

The “protected period” for rent debt will differ depending on the business and will end on the date the business last faced closure or restrictions on how to operate. This period, at its lengthiest, runs from 21 March 2020 until 18 July 2021 in England and until 7 August 2021 in Wales.

The bulk of the provisions in this Bill set out the parameters of the binding arbitration scheme. To ensure that the scheme gives rise to speedy resolutions, tenants and landlords will have a period of six months to refer a case to arbitration, beginning when the Bill comes into force. Alongside a referral to arbitration, the applicant will be required to put forward a proposal for resolving the matter of relief from payment of protected rent debt.

The Secretary of State will approve the arbitration bodies that he considers suitable and capable of delivering the scheme. These arbitration bodies will then maintain a list of suitable arbitrators that are available to act and appoint arbitrators to each case. Arbitrators will review the proposals and any supporting evidence to determine whether the dispute is eligible for arbitration under the scheme and, if so, whether any relief from payment of the debt is appropriate. This relief may take the form of a reduction to the total debt, cancellation of the debt, or an extension to the repayment period of the debt. The arbitrator will consider financial records and any other evidence considered appropriate to assess the viability of a business or the solvency of a landlord. The arbitrator will make an award and, if granting relief from payment of a protected rent debt is appropriate, the award will set out the terms of that relief. These awards will then be published, which will help set market expectations and aid negotiations outside of the arbitration scheme. So the scheme will be transparent in its operation.

The arbitrator will base their award on a set of clear and proportionate principles, which we have considered carefully. These principles are set out in Clause 15 and make it clear that preserving viable businesses is a key aim of the scheme, but that the preservation of a tenant’s business should not come at the expense of a landlord’s solvency. The principles provide that any relief given should be no greater than necessary and that any tenant who is able to pay should do so. The arbitrator must follow these principles when making their award. Only viable businesses, or those that would become viable with an award of relief from payment, will be eligible for arbitration. For example, a business could be granted an award that reduced the amount of debt owed if that reduction would allow it to become viable again.

In this way, we are actively supporting businesses that will continue to prosper and grow, will provide jobs, and will support the UK to build back better. As your Lordships will have expected, we have engaged with arbitration bodies to develop this approach, and I am confident that it will deliver swift resolution for tenants and landlords locked in disputes.

As I mentioned earlier, only rent debt attributable to a specific period will be eligible for arbitration. This rent debt will continue to be protected for the six-month application period and then up until the end of the arbitration proceedings.

The protections afforded to this rent debt are contained in Clauses 23 to 26. These include a targeted continuation of existing restrictions, such as the moratorium on the eviction of commercial tenants, the restriction on landlords’ ability to seize goods in lieu of unpaid rent and restrictions on issuing winding-up petitions against commercial tenants. This ensures that parties who cannot come to an agreement will have a genuine opportunity to apply to arbitration before landlords will once again be able to resort to other legal remedies. I am confident that this six-month period is enough time to allow tenants and landlords to apply to the scheme. However, if there is evidence that this period is not long enough, the Bill allows for the application period to be extended.

The Government have engaged extensively with tenants, landlords and arbitration bodies throughout the development of this Bill. The policy contained in it has been rigorously tested with key stakeholders. A call for evidence was launched in April 2021, which gathered the views of tenants and landlords on the temporary measures, the state of rent negotiations and the preferred exit options for the temporary measures. The feedback from that call for evidence made it clear that the voluntary nature of the code of practice was hindering negotiations and that a statutory solution was required. Nearly half of respondents—49.2%, to be precise—were in favour of binding adjudication, and only 27.4% were against this proposal.

Since the call for evidence concluded, we have continued to work closely with tenant and landlord representatives, as well as arbitration bodies, to help shape this legislation and support negotiations. My colleague the Minister for Small Business, Consumers and Labour Markets, Paul Scully, has met regularly with tenant and landlord representatives to discuss these proposals and the issue of rent debt in the affected sectors. I am grateful to the bodies representing commercial tenants, landlords and arbitrators which have taken the time to provide feedback. They have recognised the efforts that the Government are making to encourage continued negotiations and the value of establishing a system in the event that negotiations fail.

I held a drop-in session yesterday, and thank the noble Lords, Lord Hunt of Wirral and Lord Shipley, and the noble Earl, Lord Lytton, for their time and interest. I look forward to working again with the noble Baroness, Lady Blake, and the noble Lord, Lord Fox, with whom I worked on the Professional Qualifications Bill. I hope to be pleased to hear of their support for this Bill and warmly welcome their constructive scrutiny as we discuss it in more depth.

To conclude, the Bill brings forward a solution that should be used only when parties are unable to reach agreement between themselves. The Government’s position continues to be that tenants and landlords should negotiate where possible. The protections put in place by the Government during the pandemic have offered much-needed respite for businesses fearing insolvency. However, these measures must come to an end. This Bill will facilitate an exit from these temporary protections and support the resolution of unpaid rent debt that is preventing commercial tenants and landlords from recovering. I beg to move.

13:18

[Lord Shipley (LD)]

My Lords, I first remind the Committee that I am a vice-president of the Local Government Association—I do so because local authorities can have a substantial role as commercial landlords. I thank the Minister for his comprehensive introduction to the Bill and for his meeting yesterday with Peers who have an interest in the Bill to discuss its details. I like the opportunity afforded by this new system for debate; it is a most welcome change.

I welcome the Bill itself because it addresses the need to minimise bankruptcies of tenants and landlords. Many businesses have been kept afloat by reductions in their costs while closed during the pandemic, which have been important contributions by the Government to supporting those businesses. Many are viable businesses that simply need time to recover. However, as temporary protections for tenants are reduced, it is vital that the recovery of those businesses is not put in jeopardy by the actions of landlords. That said, landlords have not received £1 in every £6 that they should have over the last two years.

The Bill seems to balance the needs of landlords and tenants fairly. Binding arbitration clearly has very substantial support and seems the best way to proceed for businesses forced to close. A balance has been struck between the needs of landlords and the needs of tenants which should significantly reduce closures which are not in the interest of consumers or landlords. I am thinking here of the importance of the Bill to the retail sector and the high street, which needs all the support it can get. Empty shops just make the physical retail offer less attractive and will lead to even greater dependency on internet shopping.

I move to some specific questions on clauses that the Minister may be able to respond to today—if not, later in writing, if that helps. In Clause 2 there is mention of interest rates payable. My question relates to the levels of interest payable on unpaid rents and what controls the Government are planning, if any, on excessive rent charges. How are those to be prevented?

In Clause 9, there is a requirement to refer a dispute for arbitration within six months of the Bill passing—the Minister referred to this figure. Longer than six months may prove necessary, but I accept that the Government have built in a means of addressing that problem should it arise. In that context, does the Minister feel that there are enough arbitrators to meet the demand that is likely to be forthcoming? It is estimated that 7,500 businesses could need arbitration because there has been no resolution of the stand-off between the landlord and tenant directly. That is a large number; therefore, there is a question of capacity within the system as a whole.

On Clause 13, is the Minister satisfied that there are enough protections in place to ensure that an error is not made by an arbitrator on the viability of a business? I refer to alleged errors of judgment by arbitrators and whether they can be challenged by a tenant or whether they simply cannot be challenged at all, even with recourse to the law. I can foresee articles being printed in the press complaining about the actions of arbitrators where they are deemed to have made an unfair decision about the viability of a business. I recognise that these are difficult and sometimes complex issues, and there are issues of commercial confidentiality as well. Nevertheless, I would welcome the Minister’s assurance that in the defining of viability by an arbitrator, the rights of the tenant are protected.

Clause 14 requires rent debt to be paid within 24 months of a decision. I am not sure that that is long enough. It may be in most cases, but it may not be enough for a business which is viable but on the margins and which would benefit from a longer time period. How fixed is that 24 months in Clause 14?

I say in passing that I welcome Clause 27, which will enable the Secretary of State to apply the provisions of the Bill to business tenants forced to close by future coronavirus restrictions. It is wise that the Government are proposing to use the affirmative procedure. Clause 27 is very important.

I have two further issues, as I draw to a close. The first relates to case law, because there is going to be a great deal of new case law. The Minister referred to transparency in the operation of the Bill, and I welcome that intention. I am not quite clear how, with all the new case law that is established by all the binding arbitration, there will be a system in place to ensure that binding decision-making reflects that body of case law. Is it the Government’s assumption that there will not be any new case law? With 7,500 cases all being heard over a comparatively short period, how are we going to ensure that a decision made in one place by an arbitrator is actually similar to a decision made somewhere else by a different arbitrator?

These are imperfect systems—I fully understand that —but nevertheless I am not quite clear on the extent to which decisions and the reasons for them can be shared publicly for other arbitrators or the general public as a whole to see. I recognise that there are issues around commercial confidentiality, but are the Government satisfied that enough is going to be published about the reasons for decision for awards that are being made?

Can I just double-check the issue of fee levels with the Minister? This Bill is about businesses on the brink. Fee levels for binding arbitration will be important for a tenant. I hope that the Government have in place means of ensuring that fee levels will not be excessive.

The Minister has explained the context. The Government have taken a whole set of temporary measures to support businesses over the last two years, which I have welcomed, but the problems that we now face are, first, with the business rates system, worth £25 billion a year to the Treasury. It is expensive, and I read in the press that there is a stand-off between the Department for Levelling Up and the Treasury about whether retail premises on high streets in particular should, for a period at least, pay no business rates.

There is a huge problem then for local government, because income from business rates really matters. We do not have the right level of discussion about some of those big strategic issues, and I am not sure that it is something that can be dealt with by only one political party. That said, there is a business rate context; for many businesses on the brink, business rates really matter, but they are also facing rises in general inflation and rising energy costs. What this Bill does can actually help mitigate some of the cost pressures that viable businesses currently face.

I welcome this Bill, which is a huge step forward. The Government have protected themselves by enabling themselves, through the negative or affirmative procedure, to make changes to it—but I welcome it, and I commend what the Government are attempting to do.

13:28

[The Earl of Lytton (CB)]

My Lords, I, too, welcome the opportunity to debate this Bill—I apologise, I may be standing too close to the microphone; it is my stentorian tones. In making my initial comments, I refer to my interests as a practising chartered surveyor and my association with the Chartered Institute of Arbitrators, although I do not practise as an arbitrator—and last but not least as a private landlord of let commercial property, although I do not have any rental or arrears issues. However, I do have a working knowledge of commercial landlord and tenant matters.

I thank the Minister for holding the briefing session yesterday and for his introduction today, and I acknowledge straightaway that the Government have made a necessary move to deal with an extreme set of circumstances surrounding suspension of business during parts of the pandemic and the accrual of rent arrears, as we have heard. So I agree that this is essential. After all, keeping tenancies going, as opposed to having occupational voids, is straightforward economic common sense. Like all such pieces of legislation, it is a typically blunt instrument of last resort, but I note that the threat it poses already seems to have concentrated some minds, and the estimate of some 7,500 cases is certainly less than I feared was the case.

Although I note that arbitration was the majority method of determination in response to the call for evidence, it certainly is not free from issues of its own and is not necessarily cheap, quick or, if appealed under the limited grounds under the arbitration Act, final. Good adjudication comes at a cost, and my sense is that the department may be underestimating this. The Chartered Institute of Arbitrators tells me that it has a budget package for written representation-only cases involving claims of between £5,000 and £100,000 and exclusive of the parties’ own costs. That is priced at £3,000 per case, split between the parties, and turned round in circa 89 days. But actual costs may vary substantially because of the actions of the parties themselves, and can easily be escalated. I must say that the proposed timeline in the Bill is, to my mind, tight.

In the absence of a contractual agreement to refer—and, potentially, of any party agreement of any sort—running up to arbitration under the Bill, I would suggest that some default terms of reference will be required and that minimum standards of information from the parties be specified. I am not sure that the Bill actually achieves this.

I have already raised with the Minister what I see as an asymmetrical approach based on tenant viability on the one hand and landlord insolvency on the other. These are not the same and, in my opinion, it would be difficult for an arbitrator to compare those on a truly like-for-like basis. From the various documents it is hard to identify, for instance, just exactly what critical change to a landlord’s circumstances as between, say, extended borrowing or actual insolvency, is intended to form the relevant line in the sand for the purposes of the Bill, so I hope that that can be clarified. One cannot necessarily assume that either landlords or tenants will be in the stronger position, so this needs a fair balance, bearing in mind that many landlords may be private individuals with one or two pension pot properties, just as tenants may be sole traders.

I am concerned, as is the noble Lord, Lord Shipley, about the principle of viability as it applies to tenant businesses and how that can be assessed in practice. I believe a number of eminent bodies also have concerns about this. The revised code is singularly uninformative and the Bill a fairly minimal checklist. In early years, a business may be technically unviable or depend on personal good will until it has sufficient trading under its belt to be objectively seen as solvent. That is a normal risk. The arbitrator, at a cost to somebody or other, would have to make an initial decision on viability before proceeding to the issue of rental liability and what should actually be paid. I would be concerned if this Bill were itself to create perverse incentives, and I ask the Minister what safeguards will exist to ensure objective viability tests and monitor fair balance in outcomes.

The noble Lord, Lord Shipley, in a magisterial presentation, referred to the question of arbitral precedent, and I agree with him. The circumstances here are rather specific: it is not very normal to be looking into a tenant’s viability. I am aware that there is some experience of dealing with things like turnover rents but again, that is a rather different algorithm.

Any perceived imbalance may reinforce trends. I take the point the Minister made about returning, hopefully, to normal business, but I am not sure that there is such a thing. Landlord and tenant businesses can in future expect much greater scrutiny of management culture, lettings policy, trading viability and financial status now that their risk profiles and proclivities will be more apparent. Consequential investor, lessor and lessee nervousness may well be the result, especially if, as noted by British Property Federation, this sets a precedent for future “step-in” powers. As the BPF also observes, this is not just some limited category of landlord and tenant who may suffer varying degrees of loss, both financial and of confidence, as a result of emergency measures; it is pension funds, local authorities —referred to by the noble Lord, Lord Shipley —individual investors and entrepreneurs, charities, the vitality of high streets, consumer choice and convenience: in other words, all of us.

The noble Lord, Lord Shipley, referred to the bigger picture, and I relate to what he said. Looking at these things in an overarching policy balance is extremely important.

To a slightly more specific point, one question raised with me is whether rent arrears agreements already reached voluntarily, whether under threat of these sanctions or not, could be reopened and made subject to the Bill’s arbitration provisions. My working assumption is not, but the applicable degree of finality in that respect needs to be spelled out unless 7,500 is going to become some rather larger figure.

Like the noble Lord, Lord Shipley, I am not reassured about arbitral capacity in the property sector. It is not just a matter of signing up new arbitrators or rolling out existing ones but of how many have adequate experience in the commercial landlord and tenant sector. I am not sure that experience of

“business finances and commercial negotiations”

referred to in the code represents the complete skill set needed, so I would appreciate further and better information on this because the objectives of the Bill depend on the window of opportunity of six months and delivery in fairly short order.

The Royal Institution of Chartered Surveyors—RICS—believes this Bill inadvertently may make arbitrator appointing bodies responsible for the oversight of arbitrators, their conduct and their fitness. If correct, I sense that that might run counter to the provisions in the Arbitration Act 1996 relating to arbitrator autonomy and powers. More particularly, it could also create liabilities for the appointing body, increase costs and slow the process, always assuming the bodies are willing or legally able to take responsibility.

RICS also raises the pertinent point that arbitrators should be required to be free of conflicts of interest. I was once accused of bias because “Everyone knows that chartered surveyors always act for landlords.” I suppose in part, because I have in the past acted for both landlords and tenants, I am guilty as charged, but that points out that it is as much the perception of bias and resultant confidence in arbitrator impartiality that matter as opposed to actual conflicts of interest. Furthermore, most cases of appointments by appointing bodies rely on arbitrator self-disclosure of any conflict of interest, so I think the point is valid.

Nearly finally, although I appreciate that this ship may have sailed, I particularly dislike the conflation of rack rent and service charges as rent for the purposes of arbitration under the Bill. I do not believe that that merging proposal was made clear from the outset. It is one thing to be deprived of the rent but another thing altogether to be liable for the services related to use and occupation that are an on-cost payable to a third party and with no possibility of relief. The Government should reconsider that because different considerations apply within the stated global definition of rent.

That said, I appreciate the need for the Bill to complete its passage speedily but hope that I may have some answers to these points.

13:38

[Lord Fox (LD)]

My Lords, I do not think I have spoken in a debate before Second Reading in the Moses Room before and I do not think I have spoken when the department staff almost outnumber the speakers, which probably points out why we are in the Moses Room.

Many of the issues I am going to cover have already been covered by previous speakers. I am quite relieved about that. Given the vast experience in local government of one speaker and the experience in the property market of the other speaker, I am rather glad that I am covering some of the same ground, because we appear to be in the right place.

Covid has shocked the commercial lives of our villages, towns and cities across the country. As we have heard, the Bill is designed to help deal with one of the big aftershocks, rent debt. The Minister said earlier that there is £6 billion of rent debt. To put this into context, all town centres and high streets have been hit, but businesses with physical premises—bricks and mortar—tend to have suffered the most. For example, some shops have lost close to one year’s trading in value terms over the course of the Covid pandemic.

I am sure the Government will say that help has been on hand on during this process, which it was, but, meanwhile, as we have heard, rent has been accruing, Covid loans will soon need to be repaid and there is much catching-up to be done. It should be noted that the Covid shock has come on top of other difficulties that already make trading hard. The noble Earl, Lord Lytton, alluded to some, as did my noble friend. They include supply chain issues, difficulties hiring and retaining employees, wage inflation and energy costs. So this Bill is welcome, and the Minister will be pleased to know that we will be more in lock-step than we were during the previous Bill on which we worked together.

The Bill is important not least because a lot is staked on the way businesses develop going forward. Communities will be deprived of their focal points and their services if we get this wrong. Local jobs will go, and a deprivation spiral will sink further. The Minister set out the number of businesses that are currently in arrears—some 60%—which is falling, but what is the geographical breakdown? While “only” 40% of leisure businesses are still in arrears, are they focused in particular communities? My suspicion is that they are, so the concentration of damage will be higher in some areas than in others. Frankly, they will be the areas that have already experienced more problems. This is really important, and it is coming at a time when we are all being urged by the Government to reopen our economy.

As set out, there is a balance to be established between the needs of tenants and those of landlords. As has been said, it is in nobody’s interest for great holes to open up across real estate. It is right that we should remember that not all landlords are large corporates. They are private individuals or small firms and, as my noble friend Lord Shipley pointed out, in many cases they are local authorities, which are quite big players in some communities. When the Minister kindly met me, he spoke about consultation. I should have asked whether local authorities have been explicitly consulted on this issue. I would appreciate an answer to that.

When it comes to striking a balance, we support binding arbitration as a way forward. Therefore, the role of the arbitrator will be crucial, and we heard comments along those lines. The Minister told us that he has consulted bodies which will serve up the necessary arbitrators and said that they are satisfied with the way this Bill is going. Although the Minister reported that they are confident that this process will be doable—I do not know whether it is straightforward—I echo some of the comments made on the complications. Not only will there need to be an assessment of what has been lost, which should be a relatively straightforward calculation, but there needs to be a reasonable sense of business prospects. This is a much harder call. That is not only because of the hardening business environment that I have just described but because consumer and work habits have changed. We do not know to what extent these changes are permanent and how they will develop, but we do know that those changes will influence the trading prospects of many of the businesses that will come up for discussion. The definition of “viable business” will by no means be clear-cut in a lot of cases. That has already been pointed out. My noble friend asked about challenging a ruling on the viability of a business, which I think will be an issue that rears its head. How will the department support arbitrators in the definition of “viable business”?

The next point is around the source and supply of arbitrators, which both noble Lords spoke to. It is not clear yet how many arbitrators the Minister believes are necessary, assuming the 7,500 figure is a reasonable estimate. Has that number been matched with the available people? Furthermore, what is the plan for quality control and training of these people? This comes to the point made by the previous speaker. This is a different situation and role. It is a national role, and we want to see equivalent quality across the country.

Does the department have some outreach plan to make sure that the arbitrators are working from the same statistics, for example, inflation estimates? If one arbitrator is using inflation estimates of one level and another is using a different one, their outcomes will necessarily be different. How will they be kept in line? That is just one area.

The Minister outlined that, using the code, we hope there will be a diminishing need for arbitration. In a sense, as he set out, the main purpose of this Bill is to put something in place that will not be used too often. He called it a “backstop”, a term which I was going to suggest, so we are in line on that one. Its presence will hopefully act as an incentive, as we have heard, to drive prior agreement before arbitration is called on. The access process for triggering arbitration is not completely clear to me. I might have missed it in some of the guidelines, but it would be helpful if the Minister could outline how, if I am a landlord or a suffering tenant, that process is triggered.

Like the noble Earl, Lord Lytton, I have concerns about asymmetry. We discussed this when we met. When you have a big landlord and a small tenant, there is a clear opportunity for a mismatch. The Minister was clear when we met that the low cost of entry should prevent this being an issue, but can he explain how other costs will be controlled? How will the ancillary costs of preparing one’s case be limited? It is quite clear that a corporation with a large chequebook has much more firepower in preparing its case for the arbitrator than a small sole trader. Of course, sometimes the mismatch is in the opposite direction. It is not just the cost of entry but the cost of preparing one’s defence or offence in the arbitration process.

Assuming that the Government are successful in maintaining this low-cost, symmetrical situation, how will they communicate the availability of this process to landlords and tenants across the country? What is the communication plan sitting underneath all this?

I do not expect subsequent stages to be long, but I will set out a few questions it would be helpful to answer. What consultation has there been with local authorities? Are sufficient arbitrators available? What modelling has been done and what training and quality control process is sitting under this? Can the Minister remind your Lordships what constitutes an arbitrator? In our meeting he mentioned country solicitors. On reflection afterwards, a reg flag went up, given country solicitors I have known. Are changes planned in the arbitration accreditation process to acknowledge the new nature of this role? Will there be ongoing communication with arbitrators—for example, providing them with not just data and results but case studies of how those results arose, as a previous speaker mentioned—or are they effectively on their own, inventing it every time? What is the process for triggering arbitration? How will the Government go about communicating all this to tenants and landlords?

Even if this Bill is successful and the number of bankruptcies is reduced, there is going to be a waterfall of bankruptcies in our towns, cities and villages across the country. As well as this—and I would like the Minister to acknowledge it—there is other work to be done in maintaining local economies, particularly in the most underprivileged and least well-off areas. This Bill will not be sufficient to keep our way of life running in some parts of the country.

I look forward to hearing the noble Baroness, Lady Blake, and the Minister’s response to these speeches.

13:50

[Baroness Blake of Leeds (Lab)]

Following the example of the noble Lord, Lord Shipley, I also declare my interest as a vice-president of the LGA, and I thank him for that reminder.

I am very pleased to be able to contribute to this important legislation today. When I think back to this time last year, I was still the leader of Leeds City Council, and the issues that we are talking about today are so real to me—all those horrific debates and discussions with the Cabinet Office and No. 10 about which tier of restrictions we were going into, knowing what the implications of those decisions, often made with less than 24 hours’ notice, would be for local businesses and communities. Of course, there was the perverse situation that, for some businesses, it was better to go into a higher tier, because they would be mandated to close and therefore would get more protection than businesses that were not covered and had to try to make awful decisions about whether to keep trading or struggle on, and all those things.

So I come to this with a very raw, first-hand experience of understanding what businesses and landlords have been through, and the decisions that they have had to take over the past two years. Of course, we are talking about the trauma of financial loss and potential bankruptcy, but we should not underestimate the real personal cost that this has put on individuals responsible not only for their own families but for those of their employees in the decisions that they have made.

I, too, echo the concern expressed in this debate about the future role of local authorities, because they have mostly had responsibility for helping businesses and communities through the past two years—and their knowledge of all the issues that we have raised is going to be invaluable in making sure that we can move this forward. Then there is the whole issue of how we can ensure that decisions made through this process actually contribute to the levelling-up agenda. That needs to all be put together in the round.

All of us who have spoken have recognised and acknowledged the need for fairness in the process, and I think that is going to lead to future scrutiny and challenge as the scheme unfolds. I am sure that we all agree that our aim here today and in the ongoing discussions is to ensure that the proposals are effective and accessible—and we have had some discussions about accessibility and sharing information about availability of support. As I have said, most important is how we fairly balance the interests of all relevant parties.

The main principle must be, as we have heard, that no otherwise viable business should face significant burden from rent arrears without a due arbitration and burden-sharing process. Likewise, commercial landlords must have access to clear mechanisms by which to recoup appropriate levels of arrears. Again, the issue that we are facing is around the long-term interests of British businesses, and some of those judgments and decisions around viability are going to be extremely difficult. But of course, all of us are concerned with protecting livelihoods and employment, acknowledging the real difficulties that have been suffered over the past two years.

I emphasise that we have to recognise the context in which we are working. As well as the impacts we have had over the last two years—it is hard to believe we are almost coming up to the second anniversary of the first lockdown—businesses are facing major challenges in the weeks and months ahead. They include the pressures from inflation, the energy crisis and dramatic increases in fuel costs, the proposed hike in national insurance contributions, and the supply chain crises, to name but a few. That is why we on our side are focusing on additional steps to help businesses and bring forward plans to deal with the long-standing problems facing them, particularly around the vexed issue of business rates, and why we have announced a major package of measures to tackle the mess that surrounds the whole business rates agenda. This matters, and these debates will have a profound influence on how high streets, for example—it is not limited to them alone, although they do get repeated mentions—will be able to emerge on the other side of the recovery.

Debate in the other House specifically on the Bill has sought to achieve greater clarity and fleshing out the detail. As we have heard repeatedly today on the basic definition of “viable” in this context, and to echo the comments from the noble Earl, Lord Lytton, how can we ensure that it is clear and appropriate in scope?

We have stressed a great deal the question of whether we are confident about the basis for the arbitration agreements. How can we ensure that constituency of approach and delivery will be guaranteed, and how will any such inconsistencies be dealt with? How can we be sure that the fees charged are consistent and not excessive? A specific question: will there be a cap on fees? I would welcome the Minister’s comments on that. Another question has been raised repeatedly: is there enough capacity in the sector to cope with the demand and—crucially in this context—to prevent further delays?

The date of retrospectively prohibiting court judgments only from 10 November is a case in point that we have to be mindful of. Evidence from the various interested parties outlines the huge ongoing burden that businesses have been facing. The impact assessment from the Treasury notes that the total amount of deferred rent liabilities could be around £9 billion by March. There has been enough delay, and we recognise the urgency of putting the right provisions in place.

We also recognise a welcome move in that many landlords and businesses have been able to reach agreement and have settled their liabilities. I make reference as well to the code of practice from the Department for Levelling Up, Housing and Communities and to how that has contributed. However, the uncertainty with regard to coronavirus restrictions in the run-up to Christmas—whether there would be any and what they would be—had a further devastating impact for many, especially across retail, hospitality, cultural venues and many more. With debts high as a result, further costs around arbitration become even more relevant. With the levels of uncertainty facing businesses and landlords going forward, surely it would be sensible to have a mechanism to keep progress under review. Is this an area where the Minister could also provide answers for us?

I look forward to the Minister’s closing comments and particularly to hearing where we have scope to add improvements to the Bill.

14:00

[Lord Grimstone of Boscobel (Con)]

My Lords, I thank noble Lords for their insightful contributions to today’s debate. We have heard four speeches, all of which were eloquently delivered. The number of speeches was small but they were rich in content, and I congratulate noble Lords on that. I thank the noble Baroness, Lady Blake of Leeds, and the noble Lord, Lord Fox, for their constructive approach to this important legislation and the noble Lord, Lord Shipley, and the noble Earl, Lord Lytton, for the welcome they gave the Bill.

Many issues have been thoughtfully raised, and I will address as many as I can now. On some of the detailed points, I shall write to noble Lords, and I am sure we will come back to them in Committee. That will include the points made by the noble Lord, Lord Shipley, about interest and by the noble Earl, Lord Lytton, about service charges and whether it is appropriate to include them in the award. The noble Lord, Lord Fox, asked about geographical distribution, and I will find out all I can about that and write to him. I can confirm that the consultation on the Bill covered local authorities and their bodies.

I quickly remind noble Lords of what this Bill signifies and what it will achieve. Businesses which could not pay their rent due to the impacts of the pandemic have rightly been protected from evictions, seizure of goods and certain insolvency proceedings. As I said earlier, these businesses have now built up a significant amount of rent debt. I know that noble Lords welcome the fact that many tenants and landlords have been able to have open, transparent conversations, and I am thankful to those willing to be flexible when negotiating on unpaid rent. However, we have heard of plenty of cases where negotiation has been unsuccessful and agreement has not been reached. The Bill’s binding arbitration scheme is a proportionate and carefully crafted solution to these cases. It will provide the commercial tenants who need it the most and their landlords with the clarity and certainty they need to plan ahead and recover from the pandemic. In this way, the Bill will protect jobs—the noble Baroness, Lady Blake, is particularly concerned about the impact on society and jobs that we have seen during the dreadful pandemic—and, we hope, will enable a swift return to normal market conditions.

The noble Lords, Lord Shipley and Lord Fox, asked about the capacity of arbitrators to undertake this work and whether there would be sufficient arbitrators. I reassure noble Lords that we have worked closely with arbitration bodies during the development of the arbitration system. The application process which will permit an arbitration body to be included in the list of approved bodies will require it to evidence its capacity. We will not just take it for granted; it will be considered carefully before an arbitration body is admitted to the approved list. However, I believe our market-based approach of allowing arbitration bodies to set fees will ensure that on the one hand there is enough arbitrator capacity and on the other hand that the scheme is affordable.

On the autonomy of arbitrators, the Arbitration Act guarantees it. We can come back to that again in Committee.

The noble Lord, Lord Shipley, asked how the viability test would be applied. I know that the noble Baroness, Lady Blake, is also interested in this. That is probably best dealt with when are in Committee, where we can go through it in detail. I undertake to do that. The assessment of viability and solvency undertaken by arbitrators is an important step in determining whether relief from payment of rent debt should be granted. I think professional arbitrators will be able to do that. I do not want to disagree with the noble Lord, Lord Fox, about whether country solicitors are capable, but I assure him that someone who is not capable of being the appropriate arbitrator would not be put forward by the arbitration body. I am sure that neither of us would want the wrath of country solicitors to come down on our heads.

[Lord Fox (LD)]

As a point of information, it was the Minister who brought up country solicitors rather than me. Coming from the country, I need to be careful.

[Lord Grimstone of Boscobel (Con)]

I am constantly amazed by the noble Lord’s wit in these debates.

I hope that I can reassure noble Lords that these principles will ensure that the Bill supports businesses that will continue to prosper and contribute to our economy while protecting landlords.

I say to the noble Earl, Lord Lytton, that we will certainly come back in Committee to how the solvency tests will work. I will write with further details of that.

Noble Lords asked about the monitoring of arbitrators to ensure that they apply the principles consistently. First and foremost, arbitration bodies will appoint only arbitrators that are considered suitable to carry out the arbitration as set out in this Bill. An arbitration body also has the power to oversee any arbitration in relation to which it has appointed an arbitrator. So the arbitration bodies are in the front line of ensuring the quality of the arbitrators who will operate under the Bill.

The Secretary of State can request a report from approved arbitration bodies covering the exercise of their functions under this Bill. This report can include details on awards made and the application of the principles set out in the Bill to arbitration that they have overseen.

Noble Lords rightly asked about transparency. There is a requirement for arbitrators to publish the details of awards made, including the reasons behind them. This will show how arbitrators have applied the principles in the Bill to reach their decision. Over time, as noble Lords have mentioned, this will allow case law to be built up.

[Lord Fox (LD)]

Will the department retain the ability to withdraw the accreditation of arbitration bodies in the event that their performance proves to be unsatisfactory?

[Lord Grimstone of Boscobel (Con)]

I am sure that if an arbitration body is not performing satisfactorily there will be a mechanism to ensure that it does not carry on providing arbitrators, but I will check how that operates and include it in the letter that I will write to the noble Lord.

As this process continues, if there is a need to revise the guidance—for example, to clarify or add new information for arbitrators—the Secretary of State is able to do that.

Noble Lords, including the noble Lord, Lord Shipley, my noble friend Lord Lytton and the noble Lord, Lord Fox—it would have been simpler if I had just said everybody—asked about the affordability of arbitration. I think the market-based approach that we have adopted, in which arbitration bodies will set the fee levels, will work in practice. Arbitration bodies have, of course, extensive experience of costing and running schemes such as this; they are best placed to decide on fee levels to make the scheme affordable and accessible for parties, but also to incentivise arbitrators to take on cases and maximise capacity. We have tested the costs of similar arbitration schemes currently on offer in the market, and landlords and tenants in our consultations have both indicated that it is affordable. However, if it turns out not to be the case, Clause 19 gives the Secretary of State a power to make regulations specifying limits on the fees and expenses of arbitrators and approved arbitration bodies, if that is necessary.

The noble Lord, Lord Shipley, asked about opportunities for scrutinising the scheme once it has been implemented. I believe that ensuring that it is properly monitored will be a key aspect of a smooth delivery, and the most crucial way in which we will evaluate the scheme is through the requirement for arbitration bodies to publish their awards—a point I made earlier.

I understand that there may be concerns about the commercially sensitive nature of much of this information but, of course, arbitrators are required to exclude confidential information, including any commercially sensitive information, unless the person to whom it relates consents to its publication.

We really want the arbitration process to be as transparent as possible because, of course, it is in the public interest for it to be so. Transparency will help to establish market expectations of fair outcomes from the arbitration process on rent arrears for different business circumstances. Stakeholders raised questions—noble Lords are right—about transparency, but I believe that the relevant clause in the Bill will address that concern.

Noble Lords asked about consistency. Arbitration bodies will appoint only those arbitrators considered suitable to carry out arbitration as set out in the Bill. These bodies will also have the power to oversee any arbitration in relation to which they are appointed an arbitrator, which will provide the necessary safeguards we all want to see.

In conclusion, I thank all noble Lords who have engaged in today’s debate; it is a shame that we did not have a larger audience to see us in action. We have had informative and erudite contributions and, of course, as always, that is a testament to the wealth of experience in this House. I am conscious that I have not addressed all the detailed points raised by noble Lords but, of course, as well as writing, I am more than happy to meet to discuss any individual concerns as the Bill moves forward. It is a pleasure to be leading the Bill through the House, and I will warmly welcome engagement with noble Lords across the House to ensure that the Bill gives businesses and landlords the certainty and support they sorely need. I look forward to discussing it in Committee.

Motion agreed.

Committee adjourned at 2.13 pm.