Seema Malhotra
MP for Feltham and Heston · Labour (Co-op) · United Kingdom
“Public sector productivity is improving, with the latest Office for National Statistics figures showing output continuing to grow faster than inputs, and Departments being challenged to improve efficiency and modernise outdated processes.”
“I was proud to support the Feltham Convening Partnership’s young leaders summer programme last month. What struck me was their ambition for themselves and their community, as well as their call for more work experience opportunities.”
“We will be working to commence the socioeconomic duty on public bodies in section 1 of the Equality Act to require public authorities to put addressing socioeconomic disadvantage at the heart of their strategic decision making. There will be more on that to follow. Let me again thank my hon.”
“For generations, the message to those who want to enter public life or elite professions has been that if they want to get on, they must sound like everybody else. When Margaret Thatcher became leader of her party in the 1970s, she famously underwent intensive elocution lessons with a tutor from the National Theatre.”
“Whether a young person chooses a degree or a trade, their journey must be determined by merit and their potential—never by whether they have to change their voice or pretend to be someone else to fit in.”
“Interestingly, studies also regularly show that regional accents such as Welsh or Yorkshire are rated by the public as trustworthy, warm and honest. Yet when those same studies measure perceived intelligence or employability, standard southern English and received pronunciation invariably top the metrics.”
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“Q Thank you for the clarity on that. It certainly seems extraordinary that litigious landlords should in the end be doing better than those who may have acted fairly. That seems to go against all the principles and intentions of the Bill as well. I am sure the Minister has also heard the comments today. Could I ask, then, a specific question? I think you have alluded to this. Would you be supportive of arbitrators being able to also award adverse costs where one side or the other has made the process of reaching agreement more difficult? Kate Nicholls: Yes, I think that would be helpful to take into account, in terms of both arbitration fees and more general costs, if people are having to incur costs to go to arbitration because of a refusal to negotiate.”
“I am sure that there will be an announcement as soon as the Bill allows the Government the freedom to make that announcement. It will be all set out in secondary legislation. We want people with a strong understanding of the financial issues, rather than property issues.”
“Dominic Curran: We certainly have been making representations to officials since it was clear that this was the direction of travel the Government wanted to go in, and I am sure they have heard loud and clear the points that we have made, which will have been made by UK Hospitality and others. I think they completely understand and appreciate that. It would probably be helpful, as I think I said earlier, for the Government to set out as far in advance as possible, or as early as possible, who they are thinking of as eligible bodies that could undertake the arbitration process, or whose members could undertake the arbitration process, and perhaps some of the principles that they would like to see for arbitrators—as I said earlier, making sure that there is a strong understanding of accountancy issues, rather than property dispute issues.”
“Q Mr Curran, you made very helpful comments in relation to the skills and experience that you would expect to see from arbitrators. Have you had the opportunity to share that with officials previously, and has there been any discussion about, perhaps, a small discussion or consultation with you about what the skills and experience should be? It is clear that the arbitrators will be making some critical decisions about the viability of businesses. Do you think this is something that should have some more specific definition and expectations from the Secretary of State prior to the panel and the appointment of arbitrators?”
“In that context, I think it is wise to build in as much of a buffer as possible within the assessment of viability and affordability, because we are still dealing with a hugely uncertain situation, in terms of the ability of businesses to trade.”
“However, at the same time, there needs to be reflected in the guidance to arbitrators as broad a definition of viability as possible, or as broad a set of criteria as possible to be taken into account when assessing viability. Not only will there be the known knowns, if you like, of higher business rates and tax costs, but there will still be a great deal of uncertainty. Who knows where we will be in March and April, but consumer confidence still has not returned to the levels we saw pre-pandemic. While in retail, particularly, there were reasonably good sales figures for October and November, those are perhaps reflective of people spreading out their December purchases and so are not necessarily reflective of a higher level of consumer spending in the economy generally.”
“Q Finally, you alluded to the question of viability and how it should be determined. As you mentioned, from April next year the new national insurance hike, or jobs tax, and other increased costs to businesses will come in. How should those extra costs for businesses be considered when determining viability? Some sectors may well recover but will have a slower tail of recovery, particularly with the ongoing uncertainty around covid and covid variants. What is your view of how viability should be assessed, and within that context, the impact of the extra costs to businesses that are coming? Dominic Curran: The Government were right not to put in a clear definition of viability, because I think it will be different for every business, let alone every sector.”
“Those are the factors, and that is why it is so important that the arbitrators who are making those judgments about affordability and ability to pay can take account of and understand all of those issues and plug in the future changes. As Dominic alluded to, you have got the business rates, which need to be looked at site by site, as well as on a business basis. You have got changes in the VAT rate that are plugged in for hospitality. The VAT rate will change from 12.5% to 20%, so there will be a significant cost increase in tax that will be passed on to consumers. Therefore, you need to be able to look at what that will do to the end-point pricing, the affordability and the ability of those businesses to pay if we are not going to have inflation.”
“That is where I go back to the templates and the benchmarking that business organisations and trade associations are able to provide, so you can look at what happens to the margin. What we know has happened over the course of covid and over the course of the recovery period since reopening—the point at which the rent debt is fixed; it is 19 July, in our case—is a significant increase in the costs of doing business. Revenues have not tracked upwards to the same level, and we are not back at 2019 levels, and therefore the margin of profitability has been squeezed quite dramatically. It takes more sales to make a profit and to break even at this point in time, when you are looking at cost-price inflation of about 13% in hospitality businesses and revenues that are still around 75% to 80% of 2019 levels.”
“The domestic and international tourism recovery will be in 2023 to 2024, so you need to look at businesses that will be viable over that longer period and will return to a level of viability that they enjoyed previously. The questions you ask are much more related to ability to pay and affordability, and the key thing we need there is that longer timeline that looks at the sustainability of making this rent debt payment, either in full or in part, at an immediate point or over a longer period. Those are the questions that the arbitrators will look at. For the tenants’ businesses, it is about making sure that you can factor in all those costs that are coming through and the recovery.”
“I ask Ms Nicholls the same question. Kate Nicholls: The questions that you raise on issues pertinent to future trading, future recovery and the costs coming down the line are more relevant to a discussion about affordability, rather than viability. Go back to the principles and the ministerial foreword to the legislation and the call for evidence, which talk about making sure that businesses that would otherwise be viable, had it not been for covid, are able to continue trading through the covid recovery period. That means that you need a longer timeline. I think it is helpful to look at, in our case, the hospitality strategy and the tourism recovery plan, which talk about the length of time it will take our businesses to recover.”
“In any of the data that will be shared with you, it is quite hard to get a handle on what that represents in terms of the totality. There will always be a long tail outside any of the data that we present to you. What I can say is that, from the data that I have seen and that is available to me, we think that the vast majority of leases that we surveyed are now covered by agreements.”
“We believe that the challenge that is left for the arbitration scheme to solve and tackle is a very small part of the total market. I must caveat that by saying that one of the challenges in all of this for Government, as much as for anybody trying to work to create solutions and outcomes, is that we do not really know how many commercial leases there are in the UK or in the retail and hospitality sector, which is the hardest hit part of the whole market by the pandemic. Business rates data from the valuation office suggests that there are about 620,000, but they vary immensely from very large property owners and very large tenants to individuals who may not be incorporated but who may have invested their savings or their pension pot in a single property and, similarly, sole traders who may be their tenants.”
“Q I want to start by asking Ms Leech some questions in relation to the very helpful briefing note that was sent through to the Committee. I would be keen to understand your view about the scale of the challenge, if you like, in terms of the difficulties in achieving agreement between tenants and landlords. What does your recent survey and research show about the scale of the challenge? Do you feel that all parties are generally acting in good faith? Melanie Leech: We have surveyed our members at various points over the pandemic, and our latest survey, which represents around 16,000 leases across the whole of the UK and within our membership, shows that around 86% to 87% of those leases are now covered by some form of agreement.”
“We have seen a number of examples that have been quite widely reported of tenants who can afford to pay their rent but choose not to do so or to engage in any way, shape or form with their property owners. How do we know that they can afford to pay? Because we can see the backing that they have. We can see that, increasingly, they are now starting to pay dividends and bonuses to senior management and they are starting to invest in new properties. Our view is that if they can afford to do those things, it is a clear indicator that they are not in such distress that they need support with their rent. When they are not even talking to their property owners, they cannot have that conversation.”
“Q Thank you. To understand more about where they are not covered by agreements and what some of the concerns and behaviours of those involved might be, have you come across examples where the code has been ignored or people have not acted in good faith? What are some of the behaviours that you are seeing? Melanie Leech: In most cases, we have seen people behaving well and coming together—not always immediately, but over time. Increasingly, there is a recognition that the relationship between a property owner and a tenant is an economic partnership and that the two partners need to work together and navigate a way through together. As I say, that has happened as time has gone on and everyone has seen that this is not a short-term hit, but a long-term challenge and problem that needs to be approached in that way.”
“As I said, my joint venture partners are all private and have their own businesses that were also affected, so it is a difficult thing for me to then send them a note saying, “Please send me £10,000 by Friday,” when I know that their main business is hospitality, for example, and they are struggling themselves. Melanie Leech: I largely agree with Ms Cruickshank. The key decisions that need to be made are about viability and affordability, which require a financial understanding rather than a particular understanding of property contracts and property leases, so I agree.”
“I looked at my net assets and my cash balance, and at my tenants’ net assets and their cash balance, and then I used that, where I had a much larger tenant, as a way to explain to them our respective positions. I think it is critical that the arbitrators can understand the financial positions of both parties and the financial impact that their decision could have. For us, insolvency was a major concern, and it has been throughout, because if you have a company that owns just one property and it has bank debt, and that tenant stops paying, you are insolvent. All you can then do is inject additional cash.”
“Q Can I ask a slightly different question about the discussion we had with the previous witnesses? I will put the question to you first, Ms Cruickshank. There needs to be confidence in the arbitration process. What is your view about the skills and experience that the arbitrators should have, and do you have a view about how they should be appointed? Astrid Cruickshank: For me, the absolute key is that they have good, sound financial knowledge; they are able to look at a set of accounts—both filed and management accounts—really understand them and work out from them how the underlying business is performing. One of the things that helped me enormously in my negotiations was doing a compare and contrast of my landlord companies, because each of my properties is in a different one.”
“It is much harder for us to see how larger players will be able to enter the scheme, particularly in a situation where there is either one tenant with multiple landlords, and you are trying to deal with multiple different relationships, or the reverse: multiple tenants with a single landlord. It is really hard to envisage how, in practice, the scheme will be able to cope with those kinds of relationships. I suspect that it is the Government’s intention that those kinds of cases should not come to the arbitration scheme so that it can be kept simple. In that case, such things as accessibility and the cost structure, and people’s ability to go into it unsupported by ranks of advisers that they cannot afford to pay for, become much more critical. Ms Cruickshank can probably speak more to that.”
“For us, it is quite hard to see how the same scheme will be accessible both to very small landlords—including private individuals, either themselves or through syndicates and so on, and small companies—and to small tenants, as well as dealing with the very complex nature of the relationship between very large property owners and very large multinational tenant businesses. The aim is for simplicity and a relatively straightforward and speedy system. I think that is more naturally likely to be able to deal with relatively simple relationships and relatively small-scale sets of books.”
“Q Could I follow up with you, Ms Leech, on the issue of confidence in the system? In your evidence to the Committee you alluded to the Government’s impact assessment of arbitration, which suggests that there are some key uncertainties that could threaten how the system will work in practice. You referenced the costs associated with arbitration, the number of cases that might enter, and suitably qualified arbitrators. Could you elaborate on that, and on why there could be scepticism that the system will work effectively in practice? Melanie Leech: My understanding is that the Government want as few cases as possible to reach the arbitration process, and we share that ambition. We agree that that is right.”
“I like the fact that it includes references to ensuring that the landlord remains solvent, which was critical to me. In terms of fees, a sliding scale that is somehow related to the rent seems the easiest way to keep it affordable. I appreciate that there will have to be a minimum, but if it could be somehow linked to the sum in question that could work for us.”
“Q It might be helpful to hear from you both on whether there could be modifications to the scheme, or whether there might need to be a sliding fee structure, or some other clearer ways in which the system could work for smaller as well as for larger and more complex businesses. It would be helpful to understand what modifications to the scheme could allow it to be more flexible, in terms of being accessible and affordable for businesses that might need it. Astrid Cruickshank: I am pretty pleased with the scheme as it has come forward for landlords of my size. I take on Melanie’s points about larger landlords—going back 20 years, I was a fund manager, and it is a completely different situation—but for me, I think the scheme works well.”
“Q I want to ask you specifically about the definition of “business tenancy” in the Bill. There has been some feedback that the definition is different from and narrower than that of the relevant business tenancy in coronavirus legislation. Do you have any views about the definition and, therefore, what could come within the scope of the Bill? Melanie Leech: I have not had any concerns about that raised with me by my members. Astrid Cruickshank: I do not have any concerns about that either.”
“By the nature of this, there is going to be a lot of confidential information that is going to be disclosed.”
“Q Thank you. May I ask for your view on whether the hearings should be in public or potentially in private and what the guidance around the arbitration process should be on that? Astrid Cruickshank: Personally, I would like to see them be in private if I were to take part in one, because I would be disclosing confidential financial information to make the point about my solvency and what I can and cannot offer. Potentially, that would even go as far as who is behind you, who the actual owners are and their ability to inject money or not. I am pleased to see that the Bill says that you would not be required to restructure, so that is good. I feel that in order to make my case properly, I would want to share confidential information. Therefore, I would like it to be private. Melanie Leech: I would agree with that.”
“It may well be a paper process at a desk, in which case it does not seem to me that there is any particular need to do anything other than give the documents to the arbitrator in confidence and for them to deal with it. I assume that there will need to be some kind of public statement on the outcome, because I assume that arbitrators will want to see precedents emerging and a pattern of what is happening, particularly if there are multiple situations of different cases with the same tenant or landlord. As I say, I am sure the Government are well aware of these kinds of issues.”
“Q Both of you say that there might need to be some private hearings. Would that be something you would want to see the arbitrators have some discretion over? How do you see that? Melanie Leech: I think there are precedents already in the legal system for dealing with sensitive information. The principle is well understood. I am assuming that the Government will look at those precedents to shape how the scheme will work in practice. There are parts that will not be sensitive, and there are parts that will be. Whether it is better to have the whole thing protected or whether it is possible to split the evidence and have it dealt with in two parts, I am not sure. The other point to make is that some of this may not be heard, as it were.”
“As for poor behaviour, yes, we absolutely think that if parties do not go into or act through this process in good faith, the arbitrators should be able to award costs against them as part of the outcome. Astrid Cruickshank: I would agree with that. If the example that I gave you—three tenants just refusing to acknowledge any attempt to communicate with them—ended up in arbitration, it would seem entirely unfair that I should be picking up the costs, when I was prepared to make them an offer but they were not willing to even acknowledge that I had made it or respond in any way.”
“Q Could I ask one final question? Do you have any views about how the fee system structure should be put in place in order to make the arbitration affordable and accessible? Do you have any views about how that should implemented and whether there should be a cap on arbitration costs? Secondly, where one side might be making the process more difficult, do you think there should be the power to award adverse costs to either party? Melanie Leech: We have worked quite a lot with various small property owners, although they are not in our membership, over the last 18 months. What I have heard from them is that unless there is a cap at a relatively modest level, the scheme will not be accessible to them. Clearly it is a different matter for larger companies.”
“Within the arbitration profession, there are experts across lots of different fields: there are surveyors, there are property experts who have already acted in property dispute schemes, and there are also financial experts, accountants and so on, but I would say that financing and accounting are probably near the top of the list, given the nature of the decision-making process.”
“Q Thank you, Mr Johnston, for coming to give evidence today. In relation to the scheme being set up and the assessments that will be made, what key skills and experience will those who participate in the scheme as arbitrators need to have? Lewis Johnston: In common with some of the previous witnesses, I suggest that financial and accounting expertise will be quite crucial. Obviously, the Bill makes provision for some quite detailed assessments of viability and affordability. There are provisions about the kind of evidence that would have to be given regard to in reaching some of those decisions and making the award, and one of the impressions we got from digesting the Bill was that some of that analysis might require some reasonably in-depth expertise.”
“I note that the Secretary of State will have the power to introduce either a cap or a sliding scale, and again I emphasise the need for really forthright clarity. It needs to be very simple so people understand how it would apply to different levels of dispute.”
“The other thing to mention, which may be a pertinent lesson from the business arbitration scheme, is that it is designed to be a documents-only, very simple, quite streamlined process, which will not require representation for either party, because representation can take up quite a good proportion of the costs. It is done with an assumption against having an oral hearing. Obviously, there is always the option of having an oral hearing if the parties require it; that is in the Bill. I think it is correct that that is open to them, but I suggest that the default assumption should be against that and for it being a documents-only process. Given the simplicity of the kind of cases that are intended to go to the scheme, that would be a good way of managing the costs.”
“One example, which is not a direct parallel, is the business arbitration service run by the Chartered Institute of Arbitrators, which is designed for relatively low-value disputes—between £5,000 and £100,000. The costs are fixed at £1,250 plus VAT per party, and that includes the appointment fee and the fee for the arbitrator. It may differ in this regard, but there would need to be certainty and transparency, certainly for the parties involved, and one of the benefits of the business arbitration scheme is that there is no chance of the costs spiralling out of control.”
“Q There has been some discussion about fee structures and the fact that the Secretary of State may be able to make regulations in this area. What would be an appropriate way to have a fee structure that is affordable and accessible? Lewis Johnston: The essence of this choice is about the balance between prioritising the scheme’s affordability and accessibility—obviously, it is meant to be a simple, low-cost way of obtaining redress and getting a resolution—and the need to ensure an adequate supply of suitably qualified arbitrators. As you mentioned in your previous question, some of the required skillsets would be quite specialised, and may be at premium. There are precedent models for this kind of thing.”
“It is important that quality is not compromised. I think, overall, there is a good level of interest and there would be a healthy pipeline of arbitrators to take these cases.”
“As the previous witnesses alluded to, most of these cases, most of these disputes over the ring-fenced rent, will be or already have been settled through negotiation, so you are talking about a relatively small proportion, although it is still going to be quite a high number. There is a margin of error to take into account. On the supply side, in terms of the level of interest, there are lots of very well qualified arbitrators out there who would be forthcoming to handle cases like this. As I say, there is quite a strong precedent of arbitrators with the requisite level of skills and experience taking on fixed-fee or low-fee cases like this, but again I point out that the low fee would still have to take account of and cover the fact that a certain skillset and investment of time would be required.”
“Q Thank you for that. I want to pick up on a point you made about the number of those who may be qualified and have the relevant skills and experience, which may come forward in further discussions on the detail of the scheme. In your experience, is there sufficient interest for arbitrators to be involved in the scheme? One of the critical success factors will be that enough are involved so that there is not a backlog in dealing with some of the rent arrears cases. What is your view about the level of interest and the sufficiency of supply of arbitrators? Lewis Johnston: There is a degree of uncertainty around that, based purely on the pipeline of cases.”
“The Bill is very clear about its intention to balance the interests of tenants and landlords and to maintain the viability of otherwise viable businesses, while also having regard to the solvency of the landlords. There may need to be more guidance, and I appreciate that that might come when cases start to go through the system, about balancing the request of the tenant on what is viable for them with what is consistent with maintaining the solvency of the landlord, when those are at odds. Exactly how that could be decided is a bit of a moot point at this stage.”
“The first is something that I know will be coming when applications open for approved bodies to appoint arbitrators, and that is around the precise skillsets needed. We have a reasonably good idea of what that would entail, but a bit more detail would be helpful. For the arbitrators themselves, I think the crux point is around viability and affordability. The Bill and the code of practice go into a bit of detail about the kind of evidence that could be assessed as part of that. I think there should be clarity over exactly how much power the arbitrator will have to be inquisitorial as part of the process, the extent to which they can order discovery and so on, and the kind of evidence they can ask for from the parties.”
“Q What is your view on how arbitrators should be guided in going through the process? What needs to be in place, in terms of guidance or otherwise, to make their role clear, so that there is some consistency? I imagine that confidence will come with clarity and consistency. Do you have any concerns or any message for us about what you want to see in place—what kind of guidance needs to be brought forward? Could I extend that to how assessments might need to be made of viability and ability to pay, with other costs—business rates and other costs, like the jobs tax—that might be coming on stream for businesses as well? Lewis Johnston: Certainly. I was pleased to see, in clause 21 of the Bill, that guidance will be provided. There are several areas in which guidance might be necessary.”
“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.”
“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.”
“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.”
“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.”
“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.”
“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.”
“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.”