Further Tenant Protections – The Corporate Insolvency and Governance Bill And Amendments To Commercial Rent Arrears Recovery

On 25 March 2020, the Coronavirus Act 2020 was brought into law. Of particular relevance to landlords and tenants, this gives certain protections to tenants from eviction, specifically providing a moratorium on forfeiture for non-payment of rent, extending to 30 June 2020. This was, presumably, intended to address the rental quarter usually falling due on 25 March.

Importantly, the Act did not provide for any waiver of rental sums due in the March quarter and unless a landlord waives such sums, a tenant remains liable for the rent even after the moratorium comes to an end.

Generally speaking, landlords and tenants have tried to work together in these difficult times and have sought to agree rent waivers or deferrals until such time as the tenant has sufficient cash flow to meet the rental liabilities. However, some landlords have taken an aggressive approach and in the absence of being able to forfeit the tenancy, have tried other ways to recover rental sums due. These have included the use of Commercial Rent Arrears Recovery, service of statutory demands and winding up petitions.

As a result, the government has recently taken further measures to protect commercial tenants and indeed businesses generally. On 20 May 2020, the Corporate Insolvency and Governance Bill was introduced to the House of Commons and given its first reading. The explanatory notes published with the Bill set out three main aims:

– To introduce greater flexibility for the insolvency scheme and provide some much needed breathing space to companies in the current climate in order to maximise their chances of survival.

– To temporarily suspend certain aspects of insolvency law to protect companies from aggressive creditor action and to support directors in trading through the present circumstances without the threat of personal liability.

– To provide companies and other organisations with temporary easing of regulations in relation to filing and meetings.

Of particular relevance for commercial landlords and tenants, the Bill includes provisions restricting the use of statutory demands and winding up petitions where the debtor’s inability to pay is due to reasons relating to Covid-19. It provides that a winding up petition cannot be presented during the period from 27 April 2020 (thus giving it retrospective effect) and 30 June 2020, or one month from the date the Bill comes into law, whichever is later, unless the creditor has reasonable grounds for believing that (a) Covid-19 has not had a financial effect on the debtor, or (b) the debtor would have been unable to pay its debts even if Covid-19 had not had a financial effect on the debtor. Where a winding up order is made on or after 27 April 2020, the winding up order will be a nullity – in other words, the order will not be set aside but will be held void and treated as though it had never been made.

Further, no petition for the winding up of a company may be presented on or after 27 April 2020 on the grounds that a company has failed to satisfy a statutory demand if that demand was served between 01 March 2020 and 30 June 2020, unless either of the grounds set out at (a) and (b) above can be demonstrated by the petitioning creditor.

As to the meaning of “financial effect” of Covid-19, this appears to be a low threshold as far as the debtor is concerned; Covid-19 has a “financial effect” if the debtor’s financial position worsens in consequence of, or for reasons relating to, Covid-19. This suggests a greater measure of protection for debtors as theoretically it may not prove difficult at all for a defaulting tenant, for instance, to show that its financial position has worsened because of Covid-19.

The Bill proposes a number of other corporate measures including in relation to company restructuring, wrongful trading and filing requirements. However, they are outside the scope of this article.

Commercial Rent Arrears Recovery (CRAR)

CRAR was introduced in April 2014 in order to reform what was seen as archaic law relating to the recovery of rent from tenants and to better regulate the regime. Under the CRAR regime, landlords have the ability to utilise a statutory procedure to recover unpaid rent by taking control of tenant goods and selling them, through the use of certificated enforcement agents.

In further measures designed to protect tenants, the Government introduced into law the Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020 (“the 2020 Regulations”) on 25 April 2020. The 2020 Regulations amend the Taking Control of Goods Regulations 2013 and the Certification of Enforcement Agents Regulations 2014 and will be in force until such time as lockdown restrictions require.

As far as commercial landlords and tenants will be concerned, the main change is that the minimum amount of rent which must be outstanding in order for a landlord to exercise CRAR is increased from 7 days’ rent to 90 days’ rent. That will provide some breathing space for commercial tenants. However, for tenants which were unable to pay the March quarter’s rent, the 90 day period will expire just before the June quarter’s rent becomes due and they will therefore be vulnerable to action by the landlord.

Summary

The measures introduced by the government since the lockdown began are designed to offer protection to commercial tenants. However, they do not have any effect on the continuing liability of tenants to pay ongoing rental sums due. Tenants should therefore not assume that these measures amount to rental concessions or holidays and where they are unable to pay the rent, they should open sensible dialogue with their landlords. They should also ensure that where they cannot meet rental payments, they are able to demonstrate that this is due to the economic impact of Covid-19. Where it is for another unrelated reason, they will not be able to obtain the protection of the proposed measures set out above and the Court will require credible evidence from them, not simply sweeping statements as to the impact of the pandemic.

Commercial landlords should be mindful of these changes and that they are unlikely to be able to engage in certain measures to recover rental sums due, at least for the March 2020 quarter, where the tenant’s failure to pay is connected with the economic impact of Covid-19.

Further, the hearing of winding up petitions is clearly likely to engage more of the Court’s time because the Court will be required to consider the financial question of whether the debtor’s inability to pay is as a result of Covid-19.

This article is not intended and should not be relied upon for legal advice, Should you wish to discuss your matter, please contact Joe Reeves of our Litigation Department on 0207 481 6383 or joe.reeves@wellerslawgroup.com.

For our Sevenoaks office please contact Jonathan Tyler on 01732 457575. For our Surrey office call Craig Batko on 01372 750100.