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.
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