On 9 November 2021 the Commercial Rent (Coronavirus) Bill was introduced to the House of Commons (accompanied by an updated Code of Practice). Currently before the House of Lords, the Bill seeks to achieve negotiated resolutions of commercial rent arrears disputes, where such arrears resulted from the impact of government measures to combat the spread of COVID-19, by introducing a binding arbitration procedure for landlords and tenants within the Commercial Rent (Coronavirus) Bill’s scope, starting from March 2022.
Currently, a range of moratoria are in place to prevent commercial tenants from being evicted, bankrupted or subjected to a variety of insolvency procedures. These are due to expire in March 2022, at which point the Commercial Rent (Coronavirus) Bill would, if enacted, mandate a binding arbitration procedure and renew those moratoria for a further period for covered debts (Schedule 2).
The use of compulsory arbitration by the Commercial Rent (Coronavirus) Bill is directly inspired by Australia’s Retail and Other Commercial Leases (COVID-19) Regulation 2021, which introduced compulsory mediation to tackle Coronavirus-related commercial rent arrears disputes (in New South Wales and Queensland).
The UK Government’s Commercial Rent (Coronavirus) Bill does not refer to “final offer arbitration” (“FOA”), and yet the procedure outlined there is plainly an example of the procedure variously referred to as “final offer arbitration”, “best offer arbitration”, “pendulum arbitration” or “baseball arbitration”. Since this procedure has little in common with traditional arbitration, it is important that parties to disputes which will fall to be decided under the new scheme know what to expect.
Final Offer Arbitration
The basic format of FOA is straightforward: after each party has explained its case, it submits its final offer to the arbitrator (an amount, usually a monetary sum). The arbitrator must then choose between one of these final offers, that choice being final and binding on the parties.
To compensate for the potential arbitrariness of such a binary choice, a set of principles are usually imposed and the arbitrator must adopt one or other final offer as his award guided by those principles.
Final Offer Arbitration (“FOA”) or “baseball” arbitration was popularised in the USA as a way of resolving salary disputes between Major League Baseball players and their clubs, hence one of its names. Variations of FOA have been adopted worldwide by legislators, states, and commercial parties to resolve disputes centring around the agreement of sums or rates in a variety of scenarios, including:
• Disputes between Australian news media outlets and digital platforms such as Google and Facebook, where disputes arise in relation to remuneration for use of content;
• State-to-State tax disputes under the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (For the FOA procedure, see Article 23);
• Disputes falling to be determined under the terms of applicable commercial contracts (such as the value of a put option in a joint venture concerning a nuclear power plant).
As the above examples show, FOA is an effective tool for resolving disputes which centre around a sum of money, or a rate to be paid. Beyond that, FOA i) discourages “splitting the difference”; ii) encourages parties to settle the dispute by negotiation, and quickly (before the arbitrator makes an award); iii) encourages reasonable offers to be tendered for fear of the opponent’s offer being preferred; and iv) makes use of the commercial nous of the disputing parties (after all, who better to determine a fair price than the parties themselves?).
FOA Procedure under The Commercial Rent (Coronavirus) Bill
The FOA procedure found in the Bill is summarised at Annex C of the updated Code of Practice.
Parties should be aware that challenge for serious irregularity, and appeal for error of law under Section 68-69 of the Arbitration Act 1996 remain available. The Code of Practice provides the example of appeal “on the basis that the tenancy wasn’t in scope”.
Of course, whether there are grounds for an appeal needs to be assessed with care case by case.
Important Features of the FOA Procedure
The most important elements of the Commercial Rent (Coronavirus) Bill FOA procedure are:
Throughout the procedure, beginning with the pre-action stage, and continuing on to the arbitrator’s award, the parties are encouraged to reach a negotiated settlement. This is typical of FOA, which is designed to encourage the parties to settle the dispute as a way of avoiding having an arbitrator’s award imposed on them. Early settlement is the ideal solution to the dispute from a time and cost perspective, as a settled resolution allows the parties to forego the process of marshalling evidence and arguments, paying legal and arbitrator fees, and risking souring an ongoing commercial relationship by pursuing proceedings in an adversarial manner.
The final offer made by each party in the FOA is the most distinctive feature, of the procedure as it is the last chance for the parties to influence the arbitrator’s final, binding award, or (for that matter) to agree a settlement to the dispute. These final offers must be precisely calibrated and approached strategically by both parties.
The Arbitrator’s Principles
In other forms of arbitration, the arbitrator is free to render an award the terms of which they themselves determine. Not so under the FOA procedure: Section 14 of the Bill sets out how the parties’ final offers restrict the arbitrator’s discretion so that the Arbitrator’s Principles inform which offer is to be preferred, providing a measurable standard against which to assess the relative merit of each offer.
The Principles found in Section 15 demand that the arbitrator weigh and balance the following:
- preserving the viability of the tenant’s business;
- preserving the landlord’s solvency;
- respecting the contractual obligation of full and prompt payment of protected rent.
Available Awards of Relief from Payment
Assessed against the Principles, the arbitrator must opt for one of the two presented final offers as is.
If only one of the offers is consistent with the Principles, the arbitrator must adopt this offer as his award. If only the party who first referred the dispute to arbitration makes an offer, and it is consistent with the Principles, the arbitrator must adopt this offer as his award.
Where neither final offer is consistent with the Principles, the arbitrator regains full discretion to render an award of his choosing in line with the Principles, which will bind the parties.
The Commercial Rent FOA procedure is designed to be pro-business and to facilitate speedy resolution of rent arrears disputes. The procedure invites parties to strike a mutually-acceptable bargain, rather than to gear up for a winner-takes-all showdown.
Although it may be tempting for a landlord to view the FOA system as a losing game since the full arrears sum seems less likely to be awarded, the better view is that because the FOA system will allow the commercial tenant to remain in business, some past rent income may be foregone but the landlord will at least avoid a pyrrhic victory whereby the tenant becomes insolvent, obliging the landlord to search for a new tenant under prevailing market conditions.
Time and Costs
While there is some repetitiveness in the FOA procedure, designed to motivate the parties to come to a bargained/negotiated sum, the procedure is shorter and significantly less expensive than resort to the court system, a welcome upside.
No Resort to Court-based Insolvency or Debt Recovery Procedures
The most significant feature of the FOA procedure set out in the Commercial Rent (Coronavirus) Bill is its compulsory nature: from March 2022, a landlord and tenant locked in an arrears debt dispute must choose between i) resolving their debt dispute by mutual agreement, and ii) engaging in FOA: There is no way of accessing the court system directly.
Remaining scope for Commercial Arbitration and other forms of ADR
The Bill does not prevent parties from settling their dispute by agreement (Section 1(3)). On its terms, Section 1(3)(a) appears to allow parties to agree to resort to other ADR procedures such as mediation, and Section 1(3)(b) would facilitate their enforcement where applicable.
Section 25 places a temporary restriction (for the moratorium period) on initiating commercial arbitrations in respect of protected debts. If there is a contract between the parties containing a dispute resolution clause which calls for commercial arbitration, parties should be aware that they cannot enforce this term as they normally might: the effect of Section 25 is to make it necessary for the parties to mutually agree to opt out of the Bill’s temporary restriction, reaffirming their intention to resolve their dispute by commercial arbitration. As such, there is still scope to follow the pre-agreed dispute resolution procedures in place of the Commercial Rent (Coronavirus) Bill’s FOA procedure, subject to fresh party agreement.
Much of the complexity, delay and expense associated with debt recovery and insolvency proceedings are avoided under the Bill’s scheme: tenants are more likely to remain in business and landlords will likely access the awarded sum more quickly than otherwise, while continuing to receive rent from their still-solvent commercial tenant. Overall, the Commercial Rent (Coronavirus) Bill FOA procedure may offer a mutually-beneficial scenario to both landlord and tenant.