As the weeks have passed, there have been a number of legislative changes and government announcements, leaving the real estate sector holding its breath, awaiting guidance and certainty. The Corporate Insolvency and Governance Bill 2019-21 ('CIGB') has now been published, giving corporate tenants more flexibility and leaving landlords frustrated by further restrictions - some certainty perhaps but much still in flux.
In brief (and assuming the CIGB is passed unamended), the legal position on rent liability and remedies for non-payment will be as follows:
- Rent continues to fall due - there is no default rent-free period.
- A landlord can still issue Court proceedings for rent arrears as a debt claim.
- A landlord can still pursue a guarantor/former tenant.
- A landlord can still draw from a rent deposit.
- A landlord can exercise Commercial Rent Arrears Recovery but only if at least 90 days' rent is due.
- A landlord cannot forfeit a lease for non-payment of rent until after 30 June 2020 (which may be extended).
- Any statutory demands served on corporate tenants between 1 March and 30 June 2020 (or 1 month after the Bill becomes law if later) are void.
- A landlord can present a winding-up petition on other (i.e. non-statutory demand based) grounds (for example, on the basis of the company's inability to pay its debts or to satisfy a judgment, or evidence that its assets are less than its liabilities) but only if the landlord has reasonable grounds to believe that Coronavirus has not had a financial effect on the company, or the facts on which the grounds for the petition is based would have arisen without Coronavirus.
- If a corporate tenant becomes subject to a new Moratorium, or indeed any of the existing insolvency regimes, there are further restrictions on the usual remedies.
Relevant legislation since the start of the Covid-19 pandemic
Section 82 of the Coronavirus Act 2020 came into force on 25 March 2020, preventing landlords from forfeiting business tenancies for non-payment of rent until after 30 June 2020. The right to forfeit during this period cannot be waived unless expressly in writing. It is not yet known whether the period will be extended.
The Taking Control of Goods Regulations 2013 (SI 2013/1894) took effect on 25 April 2020, increasing the minimum net unpaid rent that must be outstanding before commercial rent arrears recovery may take place from 7 days to 90 days. This provision will continue for the same period as the forfeiture suspension.
The Corporate Insolvency and Governance Bill 2019-21 was published on 20 May 2020. It provides for amendments to the Insolvency Act 1986 (IA 1986) and the Companies Act 2006 (CA 2006) and, of significance to landlords, introduces a new statutory moratorium process and temporary (and retrospective) restrictions on serving statutory demands and presenting winding up petitions - see below for more detail. The statute is not yet in force.
Corporate Insolvency and Governance Bill 2019-21 ("CIGB") - Impact for Landlords and Tenants
There has been some focus in the media in recent weeks on landlords making statutory demands and presenting winding up petitions, with occupier groups lobbying the Government to implement protections whilst their businesses are impacted by the pandemic restrictions. Landlords are of course keen to protect income stream and investment value, and are not always in a better place than their tenants to take the 'hit', but it seems that the tenants' cries for help have been the loudest.
On 23 April, the government announced that it would be legislating "to safeguard the UK high street against aggressive debt recovery actions during the Coronavirus pandemic". After a few weeks of intense speculation by the real estate sector, the details of what is proposed were published in the draft CIGB, which had its first reading in the House of Commons on Wednesday 20 May. It is expected to be rushed through Parliament with little, if any, amendment and could be in force within the next few weeks.
The provisions apply to all UK companies, not (as had been anticipated by some) just those in the retail and hospitality sectors. They don't, however, apply to non-corporate tenants and so sole traders and other business structures occupying commercial premises will not receive any benefit from this legislation.
Statutory Demands and Winding Up
The new temporary position, is:
- No petition for the winding up of a company can be presented on or after 27 April 2020, on the ground that the company has failed to satisfy a statutory demand if the relevant statutory demand was served during the period beginning with 1 March 2020 and ending with 30 June 2020, or one month after the coming into force of the Bill, whichever is the later; and
- No petition for the winding up of a company can be presented by a creditor on or after 27 April 2020 until 30 June 2020 or one month after the coming into force of this Bill, whichever is the later, unless the creditor has reasonable grounds for believing that (a) Coronavirus has not had a financial effect on the debtor, or (b) the debtor would have been unable to pay its debts even if Coronavirus had not had a financial effect on the debtor.
The key point to note for landlords here is the first bullet point; a landlord who has served a statutory demand on a UK company tenant for the March quarter's rent simply cannot pursue it - it is effectively void - regardless of the reason for non-payment.
The second bullet point means that winding up petitions cannot be presented on other evidence of an inability to pay debts unless the creditor has reasonable grounds for believing that the Coronavirus has not had a financial effect on the company or that the debt issues would have arisen anyway. "Financial effect" would appear to have a relatively low threshold and the burden appears to be on the landlord creditor to prove to the court that it has reasonable grounds for believing that the tenant's failure to pay is not caused by COVID-19.? This would be difficult for a landlord to do without access to a tenant's accounts, although historic long-term, substantial tenant default may be adequate.?
While not yet in force, it is expected that the Court will anticipate the legislation and creditors are not encouraged to try to present winding up petitions in the days before the legislation is passed. In simple terms, these provisions effectively remove the insolvency process from the landlord's armoury in rent recovery.
The CIGB introduces a new free-standing moratorium (a temporary ban on certain activities), to provide companies with breathing space from creditor action. It is available to UK companies that are, or are likely to become, unable to pay their debts, but where it is considered likely that a moratorium would result in the company being rescued as a going concern.
The moratorium lasts for an initial period of 20 business days which 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 the moratorium will only be recoverable by landlords once the moratorium has come to an end.
Once a tenant benefits from a moratorium, landlords will be prevented from the following:
- Forfeiting the lease by peaceable re-entry (unless with court permission);
- action under the Commercial Rent Arrears Recovery Regime (the draft legislation still refers to the old term of 'distress');
- Issuing a winding up petition;
- Issuing a debt claim for pre-moratorium rent;
- Enforcing any security over the tenant's property - which may prevent a landlord drawing down on a rent deposit (depending on the terms of how the deposit is held).
This is similar to the moratorium arising on the appointment of administrators.
Landlords' remedies have always been plentiful and potent: the quid pro quo for a landlord letting out its property was the control and security the landlord had over that asset through rent collection and enforcement of the tenant covenants. Removal of landlord's remedies may have a far-reaching impact on the real estate investment market.
The government intervention has so far been entirely tenant-friendly and there is no indication that the government intends to take any targeted steps to assist commercial landlords such as restricting financial institutions exercising rights under their agreements with landlords, where an event of default occurs as a result of tenants failing to pay their rent, or introducing a 'rent furlough scheme' that has been suggested by some.
That said, the provisions will clearly help companies avoid insolvency while trying to keep their businesses viable. In the meantime, tenants should be aware of the risks that remain in respect of non-payment of rent. Any non-corporate tenants, or guarantors, can still be vulnerable to insolvency proceedings as the CIGB only affects companies. Rent and other sums under leases (such as service charge and insurance premiums) are still falling due and if unpaid, will attract interest at the rate in the lease. Further, if landlords do take action (such as legal proceedings) those enforcement costs are often added to the debt under indemnity provisions in leases.
What happens next?
The next few weeks will bring:
- The passing of the CIGB into law;
- The June quarter day (24 June) and;
- The expiry of these initial statutory periods (30 June - subject to change).
So, should a landlord try to take action now for rent arrears? This will depend on whether the landlord believes the tenant has funds and is exploiting the statutory protections to prioritise expenditure elsewhere. In that scenario, a landlord might want to exert some pressure by pursuing a debt claim. If there are third parties on the hook for rent, perhaps a personal guarantor, or a former tenant under an AGA, there are good reasons for not delaying action. For example, former tenants must be served with s.17 notice (Landlord and Tenant (Covenants) Act 1995) within 6 months of the debt arising.
On the other hand, if the tenant is genuinely struggling as a result of the situation, and has always been a good covenant, it would seem counter-productive to incur costs increasing the debt and the gap between the parties, with little hope of recovery in the short term. Reaching some form of negotiated compromise and exercising patience is what the government wants from landlords, and indeed it may be the approach that results in a long-term healthy relationship and occupied premises.
We are clearly some way from a calm and certain period in the real estate sector and we aim to keep you up to date as the situation evolves.
Originally published Tuesday 26 May 2020.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.