Commercial Rent (Coronavirus) Bill

Earl of Lytton Excerpts

2nd reading
Thursday 27th January 2022 Grand Committee

[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.

Commercial Rent (Coronavirus) Bill

Earl of Lytton Excerpts

Committee stage
Thursday 10th February 2022 Grand Committee

[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 a pleasure to debate this important Bill in Grand Committee. I would first like to speak to a group of technical amendments tabled in my name, starting with Amendment 1 to Clause 4. This clause is vital to the Bill. It sets out what is meant by a business being “adversely affected by coronavirus”, with certain rent debts under such businesses’ tenancies being in scope for arbitration. Essentially, businesses or premises that were required by regulations to close during a specified period meet the test. Subsection (3) provides important clarity that a requirement to close at particular times is a closure requirement. Amendment 1 ensures that this provision applies in relation to closure of either premises or businesses, or parts of premises or businesses. I am sure noble Lords will agree that this minor amendment produces important clarification.

Turning to Amendment 4, arbitration under the Bill will provide a legally binding solution to unpaid commercial rent from the pandemic. This is important to give certainty and enable parties to return to normal contractual relations. If a tenant is awarded relief, such as a reduction in the protected rent they must pay, they should not have liability for the rest of the original debt. If a guarantor or former tenant ultimately pays the protected rent following an arbitral award, they should be required to pay only the sum required by the award. This should be the case whether, technically, a guarantee or an indemnity has been provided. Amendment 4 expressly sets out those effects of an award. This is intended to give clarity, as requested in a comment in written evidence in the other place. I am grateful to all those who took the time to give their feedback on the technicalities of the Bill. I am pleased to propose this additional clarity through Amendment 4.

Finally, I shall address Amendments 11 and 12. Schedule 2 contains a provision specifying that the Bill’s moratorium and related provisions on debt claims apply both to tenants and anyone who guarantees the tenant’s obligation. I am sure noble Lords will agree that this is important to ensure that the tenant has a genuine opportunity to access arbitration. Amendment 11 ensures that this provision’s protection applies to former tenants who may be liable for unpaid rent under a business tenancy, whether or not they have entered into an authorised guarantee agreement. Amendment 11 also clarifies that the provision applies whether, technically, a guarantee or indemnity has been provided. This amendment addresses a helpful comment made in written evidence in the other place.

Amendment 12 has the same effect as Amendment 11, but applies to Schedule 3’s moratorium and related provisions on winding-up petitions, bankruptcy orders and petitions.

I hope noble Lords will agree that these technical amendments provide useful clarity. I commend them to the Committee and I beg to move.

[The Earl of Lytton (CB)]

My Lords, far be it from me to delay any part of this important Bill, but I would like to be clear about the Minister’s insertion of “businesses or premises”. There does not necessarily seem to be a direct alignment between the two terms. For instance, is the closure of the business inescapably the product of a prohibition, as opposed to something that is advisory? I refer back to the great debate over whether something was guidance or mandatory. It seems to me that we could be looking at businesses with subsidiary operations and so on. If we are not careful, something that affects one part of a business but not the particular part we are talking about, namely the rent on particular premises, would not necessarily align. I would be grateful if the Minister could clarify what is intended there.

[Lord Fox (LD)]

My Lords, fools rush in where angels fear to tread—I shall try to speak briefly. I welcome the fact that the Minister has been flexible and responded to points raised in the other House. Government Amendment 4 is a really good thing, but I have the same question: is this guidance or a mandatory process for the arbitrators? My understanding is that, if a tenant is able to reach a settlement through this process, that tenant no longer carries the stain of the unpaid element of the arbitration process. That therefore means that this would not stand against their credit rating and I wonder whether the Government have considered how this might not filter through into the credit rating system. As I am sure the Minister knows, the credit rating system tends to make life very difficult if you get on the wrong side of it. Some clarity on that would be really helpful.

--- Later in debate ---

[The Earl of Lytton (CB)]

My Lords, I shall make a few general comments about this group, which I certainly relate to. The Minister will doubtless have seen the item I sent in the past day or so from the Property Litigation Association, which I copied to a number of other noble Lords, about its concerns over the geometry of the arbitration process. With regard to the number of arbitrations, a matter raised by the noble Baroness, Lady Blake, and the noble Lord, Lord Fox, the final quantum of those willing to participate will not be known until the Bill and any regulations have been finalised, so willingness to participate may well depend on what is set out in them, what happens about any caps and proportionality relating to costs in the arbitration.

On the costs in the arbitration, my limited experience suggests that the process is capable of being gamed with bad behaviours referred to in an email I had from the property industry and brinkmanship as a predetermined tactic. Given that arbitration is not an inherently cheap process in such circumstances, I wonder what safeguards there are against, for instance, a bully-boy multiple having a go at a series of small landlords, a not unheard of situation. Unfortunately, the British Property Federation, which represents larger landlords, does not have data on what the impact is. I will be very interested to know whether there is any data.

I have concerns about arbitrator discretion. As I understand it, under the provisions of Arbitration Act 1996 the parameters of the arbitrator’s decision-making function are that he has to decide on one or other of the two cases before him. He is not in an inquisitorial position to try to fillet out bits of one and insert them in bits of the other, so when it is a question of what interest rate will be applied, it will be a matter of what is presented to him or her as arbitrator. If there is to be some change in this non-inquisitorial function of arbitrators—I am not suggesting that there could or should be—I can see that, if we are talking about the interests of justice rather than the much vaunted justice of Solomon, we might wish to review what is happening.

On the question of arbitration awards, again, my understanding is that these are normally private, not public, occasions. To the extent that it is proposed that the outcomes of those should be relaxed, I should like to know what revised terms, guidance or direction will follow. That might well have an impact—going back to the first point I made—on those who are already trained arbitrators who might wish to participate in this scheme and may regard the matter as a sufficiently aberrant novelty not to want to participate. I see this matter as a somewhat circular approach and would very much like clarification because I want the Bill to work in practice.

[Lord Fox (LD)]

I hope it is order for me to ask if the noble Lord agrees with me that the so-called bully-boy tenants that the Minister described are going about their bullying within the current system? How much more does this system facilitate their ability to bully or otherwise than the current system, given that we have seen high-street multiples hold their landlords to ransom without this legislation? Why would this legislation make it any easier for them to do that?

[The Earl of Lytton (CB)]

My Lords, the noble Lord asked a pertinent question and the short answer goes back to my earlier intervention. The impact on business and on premises are two separate things. Those are being coalesced into what has happened in terms of non-payment of rent and a build-up of arrears. All I would say is that it is just another factor that adds into a range of factors that he rightly points out are already in play. It adds to the complexity.

--- Later in debate ---

I hope that I have reassured noble Lords on the Bill’s measures regarding interest on protected rent debt. I do not believe that further intervention is necessary and therefore I ask the noble Lord, Lord Fox, not to move his amendment.

[The Earl of Lytton (CB)]

Perhaps I may pick up on a couple of points that the Minister made. It appears that he envisages that the arbitrator will have to use quite a lot of his own discretion. In my way of thinking, that does not fall under the Arbitration Act 1996 and is, in fact, an adjudication process of a rather different nature. He is probably not in a position to answer that right now, and if he would write to me, that would be fine. However, I worry that the way in which the Government see arbitration here is irregular in terms of what most people would understand as the strictures of arbitration.

[Lord Grimstone of Boscobel (Con)]

My Lords, I thank the noble Earl for his intervention. The best answer I can give is that it has been fully discussed with the arbitral bodies whether this is something that they feel the arbitrators they are responsible for can do. I have had complete reassurance on this point, but I will consider it again and write to the noble Earl.