Commercial Rent (Coronavirus) Bill (Second sitting)

Seema Malhotra Excerpts

Committee stage
Tuesday 7th December 2021 Public Bill Committees

[Mick Whitley]

Q Do other witnesses have anything to add?

Jack Shakespeare: Absolutely. I would echo that. The extension and the timescale seem about right; that is the message we are getting from our members. Each sector has its own characteristics. Our sector has a unique recovery curve, in that it is largely subscription focused. Recovery does not cover the cost of service straight away. That impacts recovery. The extended period of time is welcome. I am sure that we will come back to it today, but a guiding principle that needs to sit at the heart of this process is the message of sharing the burden. This is clearly a collective problem that needs a collective solution.

Martin McTague: I think it was about right when we first started discussing this, but omicron has changed all that. It is clear that we are now into a lot more uncertainty. It would be nice to have the flexibility to be able to move that date to respond to what seems to be an ever-changing virus.

[Seema Malhotra (Feltham and Heston) (Lab/Co-op)]

Q Thank you for coming in to give evidence. Perhaps I could start with Mr McTague. On the 10 November cut-off date, we have had some evidence of concerns about landlords who have not engaged with their tenants, and who may have ignored the code and started to apply for court judgments to pay the full rental arrears. Those who started proceedings before 10 November could be in a more advantageous position than those who played it fair. Have you come across that at all through the FSB, and what is your view about whether there should be a retrospective change to the 10 November date?

Martin McTague: Around the beginning of November, most landlord-tenant arrangements—probably close to 90%—had settled, but the hard-core 10% had got into an acrimonious stand-off. We engaged with the Department for Business, Energy and Industrial Strategy to try to find a way in which those more acrimonious relationships could be dealt with. As for the cut-off date, I realise that it will leave some people on the wrong side of it, but I think that it was about right when it was chosen.

Andrew Goodacre: On the cut-off date, you have to choose a date. There is never a good time, from that point of view. It comes back to an understanding of what negotiations were taking place beforehand, and how they were being managed. Martin referred to a hard-core 10%—we are probably hearing about 15% to 20%. There is a hard core of people on both sides who seem unwilling to reach a negotiation. It would be good to include at the arbitration point an insight into what negotiations and actions were taking place beforehand, and whether those actions were reasonable in the circumstances.

The arbitrator has to decide how to resolve the debt issue. We have heard stories of landlords seeking side agreements or even being willing to write off a level of debt if the tenant gave up their secured tenancy. That kind of negotiation is going on as well. Is that fair? I do not know, because the security may be worth a lot more than half the rental debt, but it is not explained properly. If evidence of what was being said before the ninth can be put forward as part of the arbitration process, that may be a happy halfway house.

[Seema Malhotra]

Q That is interesting, because some other witnesses have suggested that they would want to go further and see a greater incentive to use the scheme and to be treated more fairly within it. The more litigious landlords seem to do better for acting less fairly.

Andrew Goodacre: Most of our members deal with smaller landlords, who are possibly not quite so difficult.

[Seema Malhotra]

Q You may not have come across the same ones. Mr Shakespeare?

Jack Shakespeare: I would support that notion. I think this comes in two parts. I think it comes back to that notion of sharing the burden, and we think the process of county court judgments does not chime with the spirit of the initial code of practice and, obviously, the revised one. I also think that a ringfence should be just that and should not have holes in it. It feels like CCJs are a hole in the ringfence. I would—we would—support the notion that the CCJs process prior to 10 November should be looked at and should be included in protection.

[Seema Malhotra]

Q Do you have any concerns or suggestions about what the skills and experience of arbitrators should be? That is a slightly open question at the moment. What perspectives do you have? What experience do you think they would need to have in order to carry out the function effectively?

Andrew Goodacre: Looking at what their task is, I would expect arbitrators to have knowledge of leases and the legality around that side, but the biggest judgment that they probably have to make is one before the process starts: is the business viable? So they would need to have a good insight into business. Not all retail businesses operate on the same business model and the same margins and with the same overheads. If the first crunch question is whether the business is viable, because only viable businesses can go to arbitration, they really need to understand business knowledge and business expectations and profitabilities.

Martin McTague: I would endorse that. I think, in this particular form of arbitration, what you are looking for is to protect the interests of both parties, and clearly, if it is not a viable business, that undermines the position and enhances or makes the risk worse for the landlord, but I think most arbitrators are able to take evidence on that kind of issue anyway.

[Seema Malhotra]

Q That is helpful. Mr Shakespeare, I wonder whether you could come back on that point. I would also be interested in your view about how much arbitrators should be able to charge and what would be a fair, accessible and affordable system, perhaps for those whom you have experience of and their situations.

Jack Shakespeare: To go back to the first question, I would endorse the responses from my fellow panellists. For the first question, around viability, that business sense is utterly crucial. The first arbitration case is very important, because it is going potentially to set a precedent, so of course it is incredibly important that these people are chosen correctly.

With regard to cost, I think my answer would be “low”, for understandable reasons. Just because of the wide scope and the differences in size of the businesses that are included in the scope, I think the cost needs to be low. I think that there needs to be an opportunity or option for fees to be re-awarded in the face of bad practice or ineffective decision making. So my answer would be “low”, but of course the affordability of it is down to each business.

[Seema Malhotra]

Q Was that alluding to adverse costs as well in cases of making it difficult?

Jack Shakespeare: Yes.

Andrew Goodacre: On the cost side, I agree with what Jack is saying: the lower the better. If it is too high, it becomes a barrier to the business, the tenant initiating the action, because it is payable on initiating the arbitration, as I understand it. If a landlord thinks that it is prohibitive to the tenant, the landlord could well play the long game and keep waiting and waiting, because if you do not get the application within six months of the Act being passed, you have missed the opportunity for arbitration. It could well be that if it is too much of a barrier and too high for the individual tenant, they miss that opportunity, so it needs to be kept as low as possible.

Martin McTague: The reason why we are trying to avoid legal action is that when there is an asymmetry of power, when the landlord can use the muscle that they have to try to bully their tenant, you get unfair solutions. I think the principle must be that the cost is as low as possible. I would not want to put a number on that, but I think it needs to be as low as possible.

[Seema Malhotra]

Q I have a final, very quick question. Do you have any concerns that any part of the scheme would make it less likely to work, not in theory but in practice?

Martin McTague: My biggest concern is the cut-off date. Given that we are now entering another period of uncertainty, if we ended up with squeeze, where cases were being brushed or pressure being put on because we were getting close to that cut-off date, that could lead to some unfair outcomes.

[Seema Malhotra]

Q Do you mean the six months after the start?

Martin McTague: Yes. In other words, that is a hard cut-off. We all know that the current situation is changing rapidly.

[Seema Malhotra]

Q I think it is important—in the context of increased business costs next April, whether from business rates or the jobs tax—that your view is that those six months may not be long enough to have the scheme in place.

Martin McTague: We are seeing a lot of retail businesses hanging on by their fingernails, hoping for the best in this last quarter, and trying to get through the Christmas period, which is often make or break for them. If they get even a partial success, and start creeping towards a solution at the end of spring next year, it would be disastrous to try to drive those businesses under when they have survived all the trials and tribulations of covid so far.

Andrew Goodacre: I think the way the code of practice and the Bill have been put together is not bad, and they really try to cover all eventualities. The cost element of arbitration is a barrier to businesses, and puts the legislation at risk. The viability question—how you determine viability, and the clarity and transparency around that—needs to be addressed early on.

I know that we have asked this question and been given the answer, but there needs to be absolute clarity that the Bill applies to all businesses in scope, including those that are contracted out of the Landlord and Tenant Act 1985. That was one of the earlier questions that came back from some members, and we were told that it does include all those contracted-out businesses, but we need to be clear on that, because we do not want to end up with an unnecessarily ambiguous area that leads to legal argument.

There are also tenancy-at-will situations. When negotiations on a new lease are ongoing but have not been resolved during the closure period—the protected period—the tenant is operating on a tenancy at will. Arguably, there is no guarantee that that tenancy at will is covered by the Bill. Again, that will need clarity and understanding.

Martin McTague: There is another point that I should have raised. A lot of supply-chain businesses supply those that are directly affected and covered by the scope of the Bill—they have been seriously affected by what has gone on so far. If you take a retailer, for example, virtually everybody who is supplying that retailer has gone through the same sort of trauma as the retailer, but none of them will be protected in the same way.

Jack Shakespeare: I echo and endorse Martin’s point: one of the prospective risks is the uncertainty around the next few months. It feels like a bit of a “hold your breath” moment. You could talk about it being make or break for our sector and for different characteristics across sectors. A make or break part of the year for the gyms, pools and leisure centres sector is January to March. That is a hugely important quarter of the year, and it rolls into that time period. I would just echo that: the uncertainty of the next few months is a major risk.

[Peter Dowd (Bootle) (Lab)]

Q I want to tease out a little bit more on the extent of the impact on the Landlord and Tenant Act 1954. How wide is it? How many businesses are we talking about?

Andrew Goodacre: Contracted out?