UK Eviction Ban: The Property Industry's Wait For Covid Relief, And How It Could Get Worse

The UK’s moratorium on the enforcement of commercial leases will be extended until 25 March 2022, a full two years after it was first introduced.

Now, just weeks after the decision was announced, fears are growing among both landlords and tenants that the system of binding arbitration that will replace it will be costly, unworkable and slow. It could also pose an existential threat to the property industry.

In a statement to the House of Commons on Wednesday 16 June, Chief Secretary to the Treasury Steve Barclay announced the moratorium on commercial evictions introduced in March 2020 would carry on until March 2022. 

That was not a surprise, but what came next definitely was.

The government would introduce legislation to promote the orderly resolution of debts resulting from Covid-19’s impact on business, he said. Legislation would introduce a backstop so that where negotiations are not successful, landlord and tenant go into binding arbitration.

“Until that legislation is on the statute book, existing measures will remain in place to protect tenants from eviction until 25 March 2022,” Barclay told Parliament.

“It is the government’s first position that both landlords and tenants should resolve debts through negotiation and I welcome the various schemes already in operation.

“This [arbitration] strikes [the] right balance between protecting landlords and supporting those businesses most in need, based on the successful Australian approach,” he told MPs.

By the time Barclay sat down both commercial landlords and their tenants were reeling.

Three weeks later they still are. What the government proposed is now seen on both sides as potentially unworkable, and at best deeply problematic. Confidence that a rapid, straightforward arbitration system could be up and running by March 2022 is low. In the property industry, fears are growing that the announcement could have delivered a heavy blow.

This is how we got to this unhappy place, and what might come next.

Clear Blue Sky

It has been clear since the day it was introduced that the UK’s commercial rental moratorium was building up a massive pile of debt. Remit Consulting said that the total unpaid debt amounts to around £7B and is rising at a rate of about £1B a quarter. 

Somehow that pile of debt must be cleared, or forgiven, or payment plans devised. In most cases that process is already underway or will pose few problems. But for a hard core of troublesome tenants and an equally small group of belligerent landlords, it is agreed by all sides that a backstop dispute mechanism will be necessary.

Since last summer debate has been underway about a way to exit the moratorium and liquidate the accumulated debt.

Broadly speaking, landlords had one approach and tenants another.

The landlords, in the form of the 400 or so larger businesses represented by the British Property Federation, wanted rapid recourse to the courts.

“There’s no need to create a new arbitration structure for the few cases where people can’t reach agreement," BPF Chief Executive Melanie Leech said. "We should rely on the courts.”

The BPF envisages the court operating under agreed guidelines or a code of practise and handing down brisk judgements. Those cases where tenants have withheld rent for no good reason would be sifted out in advance.

The tenants had their eye on a version of the Australian model, the model name-checked by Barclay in the House of Commons.

Commercial Tenants Association founder Peter Bell said: “If we’d had a blank sheet of paper we would have said that, like Australia, if the tenant applies for relief, showing how Covid has affected their business, then they get 50% written off the rent, and the government pays landlords the missing 50%. That gives something to both landlords and tenants.”

However, when the government launched a springtime consultation on how to handle rent arrears, both sides were surprised to discover multiple-choice options rather than a write-in box. One of those options was binding arbitration. Some on the tenants' side ticked that box, but only, according to Bell, because it offered tenants the best deal of the six, not because they had much faith in it. 

The widely held view is that HM Treasury nixed the Australian idea, fearing it would be massively expensive, and then came up with some alternatives of its own.

One of those — binding arbitration — came out on top.

Slow And Complicated

Arbitration comes in various styles and shades, and it can get very time consuming. 

Pendulum arbitration, for instance, is quick and ought to be simple: I want X, you want Y, the arbitrator listens to both of us, then decides, X or Y. 

But if arbitrators have discretion — they might, for instance, split the difference and offer us Z, or come up with a novel solution of their own — the process takes longer, and requires more complicated guidelines to help make it work. You will also need an appeals system in case the arbitrator gets it wrong, and probably a sifting system to stop bad cases reaching the arbitrator at all. 

Among the questions all sides are now asking are: Where are all these spare arbitrators; if they are newly recruited or diverted from other causes, who will train them? Who will write the guidelines they enforce? What will the guidelines say? Who will pay for them (landlords? tenants? both?). What will be the grounds for appeal, how will appeals be heard and by whom? Above all, how long will all this take?

“Our concern is we are entering a world in which nobody knows how this works. We just don’t know. More worryingly how long will it take to set up such a system? We only have nine months. How will arbitrators be found? Who will train them? It’s a bit of a mess,” Bell said.

The landlords agreed. “Today we have no detail about how this will work — no idea if there will be an appeal mechanism, no idea how costs will be allocated between landlord and tenant, there’s so much we don’t know,” Leech.

Not for the first time in the pandemic, the government turned its back on off-the-shelf solutions and opted for something bespoke. So far that isn’t pleasing landlords or tenants.

The landlord side would feel more comfortable if it thought the arbitration system had a built-in safeguard against the risk that it is used by deliberately nonpaying tenants, the kind who were trading throughout the pandemic, and who could afford to pay. Whilst lead-swinging tenants are few and far between, letting them get away with nonpayment would set a dangerous precedent. Landlords and their agents don’t want this.

“This will only work if it can rely on 100% transparency from both sides,” Colliers co-Head of Retail Agency David Fox said. “I can see why the timing is March — the hope is that retailers will have got a normal Christmas trading period under their belt, so they will have some cash and may feel better about paying.

“But there have to be criteria for entering arbitration, otherwise there will be lawyers crawling all over it looking for loopholes. This shouldn’t be a process it is possible to game.”

The BPF said that government sources have assured them the way the moratorium is wound-down will make it clear who is entitled to the benefits of arbitration and hence provide a degree of sifting. 

Tenants don’t recall hearing that, and they said anything that smacks of a pre-qualification process will take time, during which more tenants will go bust (and hence landlords forgo any chance of repayment), so pre-qualification is best avoided.

There’s still a fight to be had.

Battles Ahead

Even if the property industry wins that battle, there is a growing sense it may have lost the war. That is because the growing length of time since normal rent was payable in March 2020 plays to the tenants’ advantage, not to the landlords. Tenants have formed bad (non-rent paying) habits that shatter the mystique around commercial leases. The government has encouraged them, so the story goes. “Of course time is a danger,  Cushman & Wakefield Head of UK Asset Services Nick Ridley said. "Not only are costs racking up, but some funds will have to write off significant proportions of the rent owed at a certain point. The longer the wait the larger the automatic write-downs. And whilst disputes are resolved the in-dispute tenancy is like a bed blocker, because you can’t replace them with another tenant.”

Behind this stands the bigger fear that the government is already hostile to landlord and tenant law, and that the introduction of binding arbitration opens the way to a more heavily state-regulated property sector. In short, it is the thin end of the wedge.

BPF Chief Executive Melanie Leech did not accept the catastrophist case, but did not underplay the risks. “I absolutely think we should be noisy about this," she said. "The arbitration scheme is a threat to long-term investment, and combine that with the consequences of company voluntary arrangements [CVAs, which allow tenants to reduce lease responsibilities] it is clearly very challenging for long-term allocations to real estate."

Although carefully phrased, Leech is sounding the alarm bells.

Today, in early July 2021, the shape of the government’s binding arbitration scheme remains unclear. The long-term consequences for landlords and struggling tenants are equally opaque.

The experience of the moratorium has been bruising for landlords. The 16 June government announcement about binding arbitration came as another unwelcome slap.

Questions will be asked about why lobbying failed to avert disaster. Others will speculate about why the property industry — often such generous donors to the ruling Conservative party — apparently managed to exercise minimal influence. There will be consequences.

With billions of pounds of rent still uncollected, and some painful issues to confront with government and internally, the property industry’s very own case of Long Covid has only just begun.