Commercial rent arrears and insolvency “ban” owing to Covid-19

Prior to the Covid-19 pandemic, there were several options available to commercial landlords in the event their company tenant fell into rent arrears. Such options included:

  1. Forfeiting the lease by peaceful re-entry and/or by issuing court proceedings;
  2. Serving a statutory demand on the tenant as a way of commencing insolvency action. If the tenant still fails to make payment, the landlord could present a winding up petition to wind up the company;
  3. Commercial Rent Arrears Recovery (CRAR). This process enables a landlord to instruct an enforcement agent to take control of the tenant’s goods and realise them to recover an equivalent value to the rent arrears;
  4. Issuing court proceedings against the tenant to recover the rent arrears;
  5. Deducting the rent arrears from any rent deposit held by the landlord (insofar as the lease and rent deposit deed permits); and
  6. Seeking payment of any rent arrears from guarantors.

Since the Government introduced new measures to assist businesses as a result of the Covid-19 pandemic, the above options have become severely restricted. As we reported on 27 March 2020 (https://grantsaw.com/government-announces-commercial-tenancy-forfeiture-moratorium), the Government has introduced a moratorium on forfeiture, as set out in section 82 of the Coronavirus Act 2020. Accordingly, option 1 above is not currently available to landlords.

Most recently, on 23 April 2020 the Government produced a press release titled “New measures to protect UK high street from aggressive rent collection and closure”. In this press release the Government states that it intends to do the following:

  • “ban” the use of statutory demands made between 1 March 2020 and 30 June 2020;
  • prevent winding up petitions being presented from Monday 27 April 2020 to 30 June 2020; and
  • introduce secondary legislation to provide tenants with more breathing space to pay rent, by preventing landlords using Commercial Rent Arrears Recovery (CRAR) unless they are owed 90 days of unpaid rent.

The press release goes on to state that “Under these measures, any winding-up petition that claims that the company is unable to pay its debts must first be reviewed by the court to determine why. The law will not permit petitions to be presented, or winding-up orders made, where the company’s inability to pay is the result of COVID-19.” Despite the press release stating that the Government wishes to “ban” winding up petition being presented, it is apparent that the “ban” itself will require the court to determine why the company is unable to pay its debts.

As things stand, there are quite a few uncertainties relating to this press release including:

  • When this announcement will become law. There has been suggestion that the Government will introduce a bill in the next few weeks which makes necessary amendments to the Insolvency Act 1986 and the Insolvency Rules 2016.
  • Whether or not the new legislation will prevent trade creditors from commencing insolvency proceedings or whether it will just be limited to landlords who are prevented from commencing insolvency action against their tenant. After all, it would be contrary to the Government’s aim, which is to keep businesses alive during the Covid-19 pandemic, if trade creditors are permitted to commence insolvency proceedings against the company tenant.
  • What the Government’s proposals are for those businesses that are operating as sole traders and where the commercial tenant is an individual instead of a company.
  • Whether or not it will apply to all companies or companies within specified sectors.
  • What criteria the courts will apply when assessing whether or not a business is unable to pay its debts as a result of Covid-19. The insolvency judiciary has already commenced debating as how it may be able to address this.

The courts have already considered the press release. In the very recent case of Short Gardens LLP v London Borough of Camden Council [2020] EWHC 1001, Mr Justice Snowdon commented on the press release by stating that “it seems overwhelmingly likely that the proposed legislation will be limited to companies in certain identified sectors of economic activity, and to relate to statutory demands and petitions based upon claims by landlords for arrears of rent. Although the press statement does contain phrases that might, if taken out of context, suggest a wider prohibition, when those phrases are read in the broader context of the announcement as a whole, I anticipate that the prohibitions are not intended to extend to entities such as SBLT and Shorts Gardens, neither of which is a tenant in the retail or hospitality industry, or to petitions which are not based upon arrears of rent, but are based upon outstanding court orders and longstanding arrears of NNDR owing under liability orders to local authorities.”

Despite the above uncertainties, it is apparent that commercial landlords no longer have the benefit of options 2 & 3 above, or at the very least, are restricted in utilising these options, particularly if a tenant can demonstrate that it is in arrears as a result of Covid-19.

Whilst option 4 above (issuing court proceedings for an order requiring the tenant to pay the rental arrears) is a possible avenue for a landlord to explore, bearing in mind that the courts are currently operating a skeleton service, this option is unlikely to produce any quick results for a landlord.

Options 5 & 6 are still available to the landlord, subject to the terms of the lease and – in respect of option 6, subject to there being a guarantor in place. However, these options can themselves present their own difficulties. For instance even if the lease permits a landlord to deduct the rent arrears from any rent deposit it is holding, whilst it may assist with the landlord’s cash flow, it would reduce the sums in the rent deposit account, which the tenant may not be able to to-up in the near future and which could otherwise be used for any subsequent dilapidations claim.

So it seems that one of the best ways for landlords and company tenants to resolve any rent arrears situation is by engaging with each other proactively and where possible, in a transparent manner, whilst also ensuring that their legal rights are protected.

This firm has recently been engaged by both commercial landlords whose tenants have failed to pay their rent and by company tenants who have not been able to pay their rent owing to Covid-19. In each of these situations we have entered into negotiations on behalf of our clients, whilst also protecting their legal rights and making our clients aware of the commercial realities of this ever evolving crisis. Therefore whether you are a commercial landlord or a commercial tenant, if you are faced with such a situation, please feel free to get in touch with our dispute resolution team

This is not legal advice; it is intended to provide information of general interest about current legal issues.