Commercial landlords will have fewer enforcement options for debt recovery if the Corporate Insolvency and Governance Bill (published 20 May) is enacted – which is expected by 3 June 2020. The bill introduces the anticipated prohibition on the use of statutory demands for rent recovery in most circumstances, as well as other provisions designed to protect tenants.
The impact is likely to add to the liquidity issues many landlords are suffering as a result of reduced rental incomes, although the new rules will be welcome news for businesses that would otherwise be viable, but for the impact of the coronavirus pandemic.
The additional restrictions (applicable to commercial property only) build on the legislation introduced last month, which temporarily prohibited forfeiture of commercial premises for non-payment of rent and restricted the ability of landlords to exercise rights under the Commercial Rent Arrears Recovery procedure.
Statutory demands no longer a route to debt recovery
Statutory demands served between 1 March 2020 and 30 June 2020 (or a later date, if there is a delay in passing the bill) will effectively be void – as the legislation introduces an absolute prohibition on the presentation of winding-up petitions predicated upon statutory demands served during this period.
The new legislation goes even further than previously anticipated, essentially removing the use of statutory demands as an effective tool for the recovery of arrears. After 30 June 2020, if a landlord serves a statutory demand which is not satisfied, it will only be able to issue a winding up petition if it has reasonable grounds to believe that:
- coronavirus has not had a financial effect on the company; or
- the facts by reference to which the petition is made would have arisen even if coronavirus had not had a financial effect on the company.
Almost all companies will be able to demonstrate that coronavirus has had a financial effect on their business, so it would appear that for the foreseeable future landlords will not be able to use statutory demands as a way of recovering rent arrears.
Moratorium for protection from creditors
UK companies that are (or are likely to become) unable to pay for their debts will be permitted to apply to court for a moratorium for an initial period of 20 business days. This will give them a "payment holiday" for sums that fell due before or during the moratorium – these are "pre-moratorium debts". The 20 business day period can be extended to 40 business days by directors without creditor consent, and further extensions are possible subject to the agreement of creditors or the court. The process will be overseen by an authorised insolvency practitioner, appointed as 'monitor' of the moratorium.
During the moratorium, the company will only be required to pay rent in respect of the period of time in which the moratorium is in place. Rent due in respect of the period falling before and after the moratorium will only be recoverable by landlords once the moratorium has come to an end.
Effect of moratorium on landlords
Once a company benefits from a moratorium, its landlord(s) will be prevented from;
- forfeiting the lease by peaceable re-entry;
- issuing a statutory demand or winding up petition;
- issuing a debt claim in respect of any "pre-moratorium debts";
- enforcing any security over the tenant's property, other than a Collateral Security Charge or Financial Collateral Arrangement.
The restriction on the enforcement of security over the tenant's property means that landlords may not be able to draw down on rent deposits. Their ability to do so will depend on the terms on which the deposit is held. The money may be accessible if, for example, the arrangement is that the money does not belong to the tenant, or if it constitutes a Financial Collateral Arrangement – something in respect of which there remains no legal authority.
As such, in many cases where a company applies for a moratorium, landlords to whom "pre-moratorium debts" are owed will have no choice other than to pursue any third parties with liability (guarantors, or former tenants, where applicable). Where no such third party liability exists, landlords will be limited to ensuring they are paid rent for the moratorium period – which does not fall within the definition of "pre-moratorium debts".
What landlords can do?
Landlords of tenants that are currently in rent arrears should assess the impact of the proposed legislation on their ability to recover those arrears. Unless they wish to keep rent deposits in reserve for liabilities other than rent and service charge, they should consider drawing down before the legislation comes into force.
They should also investigate the viability of third parties who may be liable, including guarantors or former tenants, and assess whether enforcement action against those entities would be worthwhile.
To make matters worse for landlords, there has still been no indication from the government that it intends to take any targeted steps to assist commercial landlords to cope with the effect of the coronavirus and the resultant lockdown (other than non-sector specific schemes such as the Coronavirus Business Interruption Loan and other financing measures).
One obvious step would be to introduce legislation which prevents financial institutions from exercising rights under their agreements with landlords, where an event of default occurs as a result of tenants failing to pay their rent. This would mirror the legislation brought in to protect tenants. Alternatively, some industry commentators have recommended the introduction of a 'rent furlough scheme'.