Examination of Witnesses

Commercial Rent (Coronavirus) Bill – in a Public Bill Committee at 9:27 am on 7th December 2021.

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Kate Nicholls and Dominic Curran gave evidence.

Photo of Stewart Hosie Stewart Hosie Shadow SNP Spokesperson (Cabinet Office), Shadow SNP Spokesperson (Constitution) 9:28 am, 7th December 2021

Q We are now sitting in public again and the proceedings are being broadcast. Do any Members wish to make a declaration of interests in connection with the Bill? No, so in that case, we will hear evidence from Kate Nicholls OBE, chief executive of UK Hospitality, who will appear in person, and Dominic Curran, property policy adviser at the British Retail Consortium, who will appear by Zoom. I remind Members that questions should be limited to matters within the scope of the Bill, and that we must stick to the timings in the programme motion that the Committee has agreed. For this session we only have until 10.10 am. Would the witnesses introduce themselves for the record? If they have any brief introductory remarks, I would be delighted to hear them. Kate, I will begin with you because you are in the room.

Kate Nicholls:

Thank you. I am Kate Nicholls, chief executive of UK Hospitality, which is the national trade body representing hospitality businesses, from single site to multi-chain. We have 700 member companies and 95,000 outlets—about 95% of the market.

Kate Nicholls:

In the interest of brevity and given the time, I will not make any introductory remarks.

Photo of Stewart Hosie Stewart Hosie Shadow SNP Spokesperson (Cabinet Office), Shadow SNP Spokesperson (Constitution)

Thank you. Dominic, will you introduce yourself and make any introductory remarks that you may have?

Dominic Curran:

Thank you, Chair. I am Dominic Curran, property policy adviser at the British Retail Consortium. I will follow Kate’s lead and incorporate any remarks that I might have made into the evidence that I give.

Photo of Stewart Hosie Stewart Hosie Shadow SNP Spokesperson (Cabinet Office), Shadow SNP Spokesperson (Constitution)

Thank you very much. In that case, I will open up the floor to questions. Seema Malhotra.

Photo of Seema Malhotra Seema Malhotra Shadow Minister (Business, Energy and Industrial Strategy)

Thank you very much. We really appreciate you both coming to give evidence today. I will ask Ms Nicholls a question first, if I may. Do you feel that the Government have engaged sufficiently with stakeholders on introducing the Bill, and are there specific changes that you feel may be important in order for it to better achieve its intended outcomesQ ?

Kate Nicholls:

I will begin by saying that we have had unprecedented engagement in terms of the preparation for the Bill and all the way through the coronavirus crisis. In terms of when we first started talking to Ministers in the various Departments about the impact on rent and rent debt and the ability of businesses that were forced to close to pay rent debt, the engagement began in March of last year and has continued throughout the process. Certainly over the course of the summer since the intention to legislate was announced, we have had extensive dialogue and consultation meetings with Ministry of Housing, Communities and Local Government and Department for Business, Energy and Industrial Strategy officials.

Photo of Seema Malhotra Seema Malhotra Shadow Minister (Business, Energy and Industrial Strategy)

Q Have you had any concerns at all about any definitions in the Bill—for example, the definition of “tenant”, which is slightly narrower than definitions in other parts of coronavirus-related legislation? Given your experience in the hospitality sector, what can you share about areas where there may have been difficulties with landlords and tenants achieving an agreement between them?

Kate Nicholls:

I do not have any concerns about the definition of tenant in this legislation. I think it is important that this piece of legislation sits within the existing canon of property law. There are some very clearly defined terms and references there, so the definitions do not cause us any degree of concern. An area that we may have wanted greater clarity on—we would hope that that would come forward in the guidance to arbitrators—is around the importance of sharing the burden of outstanding rent debt for those businesses that are covered by the ongoing moratorium and the mandatory arbitration process. It is also important to make sure that we have clarity around affordability and the affordability tests, but that could come through in guidance to arbitrators.

In terms of the challenges that businesses have faced over the course of the pandemic, I have to say that in large part landlords and tenants have worked very closely together to try to get through the crisis and, over the period of time that has been affected, about half to two thirds of landlords and tenants have been able to reach agreement on the treatment of rent debt and ongoing rent liabilities during that period, before the Government introduced legislation. The decision and the announcement of the intention to legislate gave a further nudge to those parties that had outstanding rent debt or which refused to negotiate or come to the table over that period. At that point, about a third of our businesses in hospitality had not got a negotiated settlement. The announcement of legislation pushed that towards resolution, and we have more businesses undergoing negotiations now. It is not all resolved. About 60% of our members say that all their outstanding rent debt is resolved and they have agreement as to how it will be treated, but that still leaves around one in five who have not got any form of negotiated settlement yet, the balance of the two being those that are in the process of negotiating while this legislation is introduced.

We see a small number of businesses that have been directly affected and continue to be directly affected. That is why this legislation is important—because without it, we would see an unsustainable rent debt that would be borne by a small number of tenants and would undoubtedly result in damage to their business and their businesses becoming unviable, or an impact on jobs, growth and investment going forward. The legislation remains vital to be able to provide the extended protection and to provide a negotiated solution for the remaining businesses that are unable to negotiate that themselves.

Photo of Seema Malhotra Seema Malhotra Shadow Minister (Business, Energy and Industrial Strategy)

Q I have one final, small question. Do you have any views about the fee structure that may be brought in? Clearly, we want the scheme to be affordable and accessible. Have you been involved in any discussions about whether there should be a cap on the fees or what kind of fee structure there should be for the arbitration process?

Kate Nicholls:

That remains an ongoing discussion with officials and Ministers. Clearly, there is an indicative fee level that is set out for an application to the arbitration process, which is consistent with other arbitration schemes. It is reasonable and relatively small scale. Obviously, even if it is a paper process—let alone if it goes to a hearing—there will be considerable additional arbitration costs. We would welcome a cap on that and direction to arbitrators about the treatment of costs that are incurred as part of an arbitration process. Particularly where there is one party who is being deliberately obstructive or who has not co-operated, it would be helpful to have an ability to award costs.

As we go forward and understand in more detail what the arbitration process will look like, and as the guidance to arbitrators comes out, we as the trade association will work to make sure that we have got template systems in place to allow small independent lessees in particular to have access to the resources—the burdens of proof and the benchmarking data—that would help them to make their case at arbitration, so that we can try to keep the costs as low as possible and avoid the need for small businesses in the sector to require professional advice and support. That is where the costs will ratchet up, rather than the entry point costs to arbitration—where people feel they need to have expert witnesses and expert support to be able to build a case. We will work to make sure that we can do whatever we can to help businesses access that in a cost-effective way.

Photo of Seema Malhotra Seema Malhotra Shadow Minister (Business, Energy and Industrial Strategy)

Q Mr Curran, do you have any additional comments to make on those areas, and do you feel confident that the scheme as outlined will work in practice?

Dominic Curran:

The British Retail Consortium, in the call for evidence that the Government published last spring, did call for a scheme that extended the moratorium to a future date and ringfenced the protection of the arrears that arose during the process, and it called for a process of compulsory arbitration. At least at headline level and in terms of the core principles of the Bill, this is what we have called for and what our members want. We do welcome it.

We have a slight concern about the definition of a business tenancy. The Bill appears to suggest that it is only a tenancy that is not contracted out of the Landlord and Tenant Act 1954. We have been assured by officials in separate meetings that that is not the intention of the Bill and that actually the Bill covers any tenancy that would be within the scope of the 1954 Act, whether it is contracted out or not, which does give us some comfort. That might be an area you would want to clarify in the course of scrutiny of the Bill.

Engagement with officials and Ministers has been fantastic, actually, throughout the pandemic and through the drafting of the Bill. We have a similar concern to UK Hospitality about the approach that will be taken on viability. Some of the definitions that the Government have said they do not want to enshrine in legislation—which is, I suppose, understandable—will be left to guidance for arbitrators. More than ever, the devil will be in the detail on that. We would want to see what that guidance is as soon as possible to give as much clarity as possible to businesses that might be thinking about using this route.

We would want to make sure that that guidance also directed arbitrators to take as broad a concept of viability and affordability as possible, so that there is enough understanding of a business’s circumstances that they could build in an allowance for the uncertainty of future cash flow and turnover, not least because there will be tax rises coming from April onwards when this process will effectively kick in—both higher businesses rates liabilities for many businesses and further tax increases on Business Network International contributions. We would want to see as much certainty in advance as possible and as much understanding of the need for businesses to have a buffer to enable them to trade while all these adverse headwinds are hitting them. We certainly share some of the concerns of UK Hospitality. I think the approach taken on fees is exactly right, as Kate outlined. While there may be a nominal, reasonable amount to enter the arbitration process, we would want the process to be as straightforward as possible, particularly for smaller businesses, which will not have access to in-house or agency consultants to support them through the process, so that it really is open to all and seen as fair and equitable.

Photo of Paul Scully Paul Scully Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy), Minister of State (London)

Q Can you give us an idea from the retail perspective of how significant the problem of rent arrears still is?

Dominic Curran:

I think it is less of a problem than it is for UK Hospitality. That is not to say that it is not a problem, but I think retail rent collection levels are higher than hospitality, as you would expect, given that the retail sector includes businesses that were allowed to open throughout the pandemic, particularly grocery and pharmacy businesses, so turnover has probably been higher proportionately in retail than it has been for hospitality.

I think it affects a smaller proportion of our sector in terms of the quantum of rent arrears, but it is still significant. It is estimated that there are still several billions of outstanding rent arrears in the retail sector during the pandemic period that the Bill covers, as far as we know. Some of that surveying does not take account of agreements that will have been reached off the books, as it were, or outside the formal rent collection dates, so it is an uncertain figure. When we have spoken to members, and this is an informed guesstimate rather than a thorough survey, it feels like we are at about 80% to 90% of rent having been collected and deals having been done, so it is a very small proportion of the outstanding rent liabilities that is left to be resolved. With each extension of the moratorium every three months, as we have seen over the past year and a half, and particularly with the announcement of this Bill and the process that it proposes, we have seen that percentage chipped away. Ever more landlords and tenants are reaching agreements. While it is a significant problem, it is probably less of a problem than it is for UK Hospitality, but it is still really important that even if businesses do not take advantage of the arbitration process, that process is there—if for no other reason than to help chivvy both landlords and tenants into making new arrangements.

Photo of Paul Scully Paul Scully Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy), Minister of State (London)

Q The code of practice will remain an important part of the solution. How has it helped over the past few months

Dominic Curran:

In all honesty, members report that the code of practice did not aid them particularly. Its voluntary nature was the real sticking point. It was not necessarily the content, which was developed in very deep and meaningful consultation with us, UK Hospitality and other interested parties, but it was the fact that it was voluntary that was the sticking point. Because it was good practice, those who were going to use that approach did so anyway, almost regardless of the code’s existence, and those who were not going to use the approach did not feel like the code applied to them, because there were no sanctions on the requirement to negotiate in line with it.

What has helped—in so far as people are aware of it—is the suggestion, and Kate alluded to it, that if you do not negotiate in line with the principles of the previous code and the revised code, there may be some penalty in terms of costs being awarded against you in any subsequent arbitration process. That may help focus minds somewhat.

Photo of Paul Scully Paul Scully Parliamentary Under-Secretary (Department for Business, Energy and Industrial Strategy), Minister of State (London)

Q Do you think signifying that we are legislating has helped move things on significantly? Have people priced this in to their discussions now?

Dominic Curran:

I would not be able to say significantly, but certainly anecdotally speaking to members, yes, it has helped.

Kate Nicholls:

I agree with what Dominic said. The code of practice content was really helpful, and it gave a steer towards negotiations and how you should negotiate in good faith. A mandatory backstop and a legislative backstop are absent. It was limited in its impact in bringing recalcitrant players to the table. When Ministers announced that they were intending to legislate, a third of our businesses still had no negotiations and a large amount of outstanding debt, with no agreement as to how that was to be treated. That has dropped from a third to 20% and it keeps getting chipped away every time we move further forward in the legislative process.

The introduction of the legislative backstop is really important. The code of practice principles will be important to guide discussions for those businesses that fall outside the legislative solution, because obviously there will be parts of the business that will not be covered by the arbitration process. It is about giving the legislative backstop and the clearer direction towards sharing the pain, coming to a negotiated solution and being able to support what would otherwise be viable businesses.

The ministerial forewords in the legislation and the call for evidence are immeasurably helpful in giving a clear direction that landlords should do whatever they can to support businesses that would otherwise be viable. That was the piece that was missing from the code of practice that gives a clearer steer of the intent of the legislation.

Photo of Ruth Cadbury Ruth Cadbury Shadow Minister (International Trade)

We have had evidence of concerns about the arbitration scheme—for example, whether there should be a single approved arbitration body and about the difference compared with other arbitration schemes in how the agreement is reached as to which arbitrator should be used. There is a concern that they should be legally qualified rather than just businesspeople, because of the nature of complex arbitration processes. There is also a question about confidentiality, which is the norm in such processes but is not specified in the Bill. Mr Curran, do you have any comments on those issues?Q

Dominic Curran:

On the arbitrators who will be used, the Bill says, if I remember it correctly, that the Secretary of State will nominate or choose which arbitrating bodies will be eligible to provide arbitrators to the process, so it remains a bit of an open question. All I would say—having spoken to officials, this point is well understood and well heard—is that given the nature of the discussions that inevitably will be had during the arbitration process, we would prefer to see arbitrators who have a strong accountancy background, perhaps more so, or at least as much as, those who have a property conflict resolution background.

The nature of the process is to look at tenants’ accounts and to make sure that their income, liabilities and forecasts for turnover are such that they can pay a relevant and viable proportion of their rent arrears. So rather than it being a dispute over the interpretation of a lease or the duties of a tenant or a landlord, it should really be about understanding the finances of that business and enabling it to pay a proportion of rent between 0% and 100%, while being able to continue to trade viably at the same time. We certainly want to see the accountancy profession well represented in that.

Whether any other trade bodies, beyond those that represent accountants, are given the right to carry out the process by the Secretary of State remains to be seen. If you wanted to get the confidence of businesses that are tenants, however, you would want to make sure that you had accountants rather than property dispute arbitrators fulfilling the duty.

Photo of Ruth Cadbury Ruth Cadbury Shadow Minister (International Trade)

Q Is there anything else to add about the arbitration processes in the Bill?

Dominic Curran:

No, I think it is a reasonable set of stages. There is a helpful flowchart in the revised code. The only point I would make is that we have a situation where the arrears, at least in retail, are historical in that they go up only to April 12 or the end of March, given rent payment dates. We want the legislation to be passed as quickly as possible, the arbitrators to be announced as quickly as possible and the process to start sooner rather than later, because it is the uncertainty that is particularly damaging for any business.

Kate Nicholls:

I agree with Dominic that the key thing is that we need to have confidence from both parties to be able to and want to use the process to resolve these outstanding matters as rapidly as possible. I am therefore more attracted to using a multiple variety of arbitration bodies, rather than just one, because we need to make sure that there is no delay in appointing arbitrators and their being able to take on the work. I also agree with Dominic that it is hugely important that they have broad-based financial and business understanding and sector-specific—in our case—understanding of the businesses.

This is not necessarily a legal issue or a dispute resolution issue. This is a financial issue that centres on viability and affordability, and therefore an understanding of the nature of the business, the way it operates, the cost of business and the costs coming down the line, as Dominic alluded to, is critical to an understanding of affordability and ability to pay. Those are the key elements that we want to see. Confidentiality, given that you are effectively opening books and sharing financial information, is really important because tenants clearly need confidence that that will be protected. However, I do not see any problems with the Bill as it is currently drafted.

Photo of Sara Britcliffe Sara Britcliffe Conservative, Hyndburn

Ms Nicholls, you touched on templates earlier. What more can we do to make sure that commercial tenants are aware of the arbitration process available to themQ ?

Kate Nicholls:

As soon as we have got the legislation through, we need the communication out there as rapidly as possible that this is coming, so that the scope of the Bill, as it goes through the House, is clearly understood. We are doing a wide range of outreach through the trade press and through our own communication channels to cascade that information out, not only through the trade association but more broadly. We are working closely with BEIS and MHCLG to make sure that that communication goes out there.

I think it is then about making sure that we have a communications plan post the Bill being enacted to ensure that there is confidence in the arbitration process and the arbitrators, and that we encourage people to use it. It will then be down to the industry to make this work. We will work flat out to do that, and to facilitate the tools that people need to enter into confidential negotiations, using the code of practice, and then arbitration if they absolutely need to as a last resort. Arbitration should be a matter of last resort in this case. Success for the Bill and the trade associations helping commercial tenants through this will be if a small number of cases actually need to go to arbitration to be resolved.

Photo of Sara Britcliffe Sara Britcliffe Conservative, Hyndburn

Q If further restrictions were to come in, what effect would that have on businesses?

Kate Nicholls:

Clearly, it affects our ability to pay and it affects viability. It is quite clear, and Ministers have been quite clear about this over the course of the last week, that we now know and understand in full the economic effects of any restrictions on businesses, such as in hospitality, which have been asked to bear a disproportionate burden over the course of the whole pandemic. It is quite clear that businesses would not survive without further additional support if additional restrictions were imposed. That would be one measure that would be necessary. Your ability to pay your rent on time a quarter in advance is significantly impaired if your ability to trade is restricted. Trading remains quite soft, and consumer confidence remains fragile, so restrictions would have an immediate and significant effect on ability to pay, viability and affordability—all the tests we are talking about. As a minimum, you would need to extend some of these protections going forward.

Photo of Sara Britcliffe Sara Britcliffe Conservative, Hyndburn

Dominic, do you want to add something?

Dominic Curran:

Kate said exactly what I would have said; if you just replace “hospitality” with “retail”, you are more or less there. The only thing I would add to Kate’s comments is that, just as at the peak of the pandemic, with the business rates holiday and restart and reopening grants, when retail and hospitality were able to reopen, you would need to see a package of measures to support businesses in the event of any further restrictions.

Photo of Peter Dowd Peter Dowd Labour, Bootle

An early-day motion tabled on 27 April 2020 expressed concern—I will not go into the details—about some large pub companies charging rents. You can have a look at it after the meeting. Partly in relation to that, I just want to get a feel of the differences you may have seen between small and large tenant and landlord businesses and how they have handled rent arrears. Have you seen any differences at allQ ?

Kate Nicholls:

If you look at the pub-owning businesses and the tied pub companies, there has been a far greater degree of forgiveness of rent among those businesses. It might not be 100% for all of them, but significant rent concessions have been granted throughout the periods of closure, and immediately granted. There has also been a greater willingness to defer rent, allowing rent debt to be accrued and rescheduled over a longer period of time.

If you look at the commercial sector, there has been a variety of different approaches, and there is not anything that really reflects the size of landlord or of tenant businesses in terms of a willingness to negotiate and to reach agreement. Some very small landlord companies have been very willing to give rent holidays, concessions and deferments, and some large commercial companies have been very difficult and intransigent in coming to the table and negotiating, and are taking further enforcement action. It is less to do with the size; it is more the nature of the landlord that has caused the biggest challenges, and the ones that we have found taking enforcement action tend to have been the larger commercial landlords, who have taken a more robust line.

Photo of Seema Malhotra Seema Malhotra Shadow Minister (Business, Energy and Industrial Strategy)

Q Could I ask your views—perhaps I will start with Mr Curran—about the 10 November cut-off? We have had some evidence suggesting that there are landlords who are choosing not to engage and are ignoring the code, and who have applied for court order judgments for full arrears to be paid. Do you have a view about whether the Bill should treat all claims equally, whether they were issued pre or post 10 November, and have you seen in practice behaviour that could end up getting around the protections that the legislation is intended to bring in?

Dominic Curran:

Thank you very much for asking that. That is a really important issue for our members. We have been asking for action on county court judgments and High Court judgments since October last year. We are very pleased that the Government listened and took account of our concerns to the extent that it was announced alongside the Bill that there would be no ability for landlords to pursue court processes for rent arrears after 10 November, when the Bill was introduced. Unfortunately, that means that any landlord who started those proceedings before 10 November is now in a more advantageous position than any landlord who was perhaps negotiating in line with the code and taking a more reasonable approach with their tenants.

We have the slightly perverse situation that the “more aggressive” landlords are actually better off now than those who might have been taking a longer, more reasonable and more timely approach. I do not see why it should be impossible for there to be a direction to courts to stay any court hearing—county court or High Court—for rent arrears pending the outcome of any arbitration process, or the period in which you could make an arbitration process after the Bill gets Royal Assent. I do not see why it is right that those landlords who have been more aggressive are able to carry on their approach.

We saw that problem early on in the process. The Government rightly and laudably made it effectively impossible in England for landlords to take properties back, to seize goods to the value of the debt, and to effectively start the process of winding up a tenant. That was the rent protection moratorium, which was very welcome and was extended, but it left, as we have been saying since October last year, a gap in the ringfence that unfortunately some landlords sought to exploit very early on. Landlords’ lawyers were sending tenants letters demanding rent arrears, and they could effectively impose the costs of that process on to the tenant.

The tenant was therefore liable for not only the rent arrears and any interest due but their landlords’ lawyers costs, which some suggested might have been slightly inflated, as well as their own legal costs in defending themselves. One member said to me, “It’s a bit like a water running downhill; it will always find a way.” That was the situation with CCJs. While it is fantastic that there has been recognition of that loophole, unfortunately it applies only from 10 November. Any CCJ that had not reached a final decision but was in train in the courts should be stayed pending the outcome of the arbitration process.

Photo of Seema Malhotra Seema Malhotra Shadow Minister (Business, Energy and Industrial Strategy)

Q Ms Nicholls, have you had similar concerns? I would also be very interested to know whether this has been a subject of discussion in the consultations that you may have had with Government, and what the outcome of that was.

Kate Nicholls:

I would echo everything that Dominic has said. CCJs have remained a cause for concern throughout this process, and we have been flagging it as a potential loophole that some landlords are exploiting. The key point about a CCJ is that it seeks to establish that the rent—a debt—is due in full, and the confirmatory judgment that it is due in full cuts across the arbitration process, which talks about a fair sharing, a fair split or fair dealing with the rent debt, so you are pre-empting that discussion. There are significant effects for the business that has a CCJ against it, in terms of credit rating, so there is an onus on a business to try to resolve the matter and prevent it from being heard in court. So this has always been a major source of concern. What we have seen is landlords—even after the date of the ministerial statement that the Government intended to legislate and about the intent on the code of practice and the arbitration process—tabling and starting CCJ processes. That is a particular cause for concern when the intention and the direction of travel are quite clear.

So I agree with Dominic. The concern is that you have this cut-off date of 10 November, which is when the legislation was published, but we would want to see direction to courts to stay all those proceedings, to avoid unnecessary costs to businesses in having to defend cases that should not be being brought and should be set to one side. I think it would be helpful if that was taken forward. Yes, we have raised that as part of the consultation process and we have raised that repeatedly with Ministers and officials over the course of the last year. As Dominic says, we have been highlighting CCJs since October of last year, but, more importantly, highlighting the continued use of them since spring of this year, when the intention was announced. I understand the challenges of legislating retrospectively, but I think it would be helpful to give direction to the courts, and clarity and certainty around that.

Photo of Seema Malhotra Seema Malhotra Shadow Minister (Business, Energy and Industrial Strategy)

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 think that would be a sensible, pragmatic principle to put into the guidance to arbitrators in order for them to be able to take that into account.

Photo of Seema Malhotra Seema Malhotra Shadow Minister (Business, Energy and Industrial Strategy)

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?

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. 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.

Photo of Seema Malhotra Seema Malhotra Shadow Minister (Business, Energy and Industrial Strategy)

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. 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. 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.

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. 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. 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. 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.

Photo of Stewart Hosie Stewart Hosie Shadow SNP Spokesperson (Cabinet Office), Shadow SNP Spokesperson (Constitution)

Order. I am sorry to cut across you in full flow, but I am afraid we are at the end of the time allocated for these questions. I thank the witnesses very much indeed. We will now prepare for the next panel.