As we await publication of the Corporate Insolvency and Governance Bill which is expected to include details of the new moratorium procedure and changes to wrongful trading provisions, in a surprise announcement on 23rd April 2020 the government confirmed that the Bill would also include further measures to protect commercial tenants from aggressive debt collection by landlords in respect of rent arrears which have accrued directly as a result of the coronavirus pandemic.
The government statement confirmed that statutory demands and winding up petitions issued to commercial tenants are to be “temporarily voided”. In practical terms this appears to mean that a statutory demand for payment of commercial rent arrears that have accrued because of Covid-19 can be ignored and there would be no need to apply for an injunction to prevent the issue of a winding up petition based on non-compliance.
Any winding up petition issued in respect of commercial rent arrears will be reviewed by the court prior to issue in order to determine whether the tenant’s ability to pay is as a direct result of Covid-19 and if the court determines that it is, the petition will not be issued. It isn’t clear how the court will be able to make this assessment based purely on the content of the petition and to the extent that any arrears at this point accrued prior to the December rent day, or before March 2020 if paid on a monthly basis, it seems improbable that Covid-19 would be the reason for the tenant’s inability to pay. However, it seems likely that any doubts in this regard will be resolved in favour of the tenant.
Initially these restrictions will last until 30th June 2020 which ties in with the Section 82 of the Coronavirus Act 2020 which prevents forfeiture of leases on grounds of rent arrears until this date.
Changes will also be made to Commercial Rent Arrears Recovery. Landlords will be prevented from using CRAR unless rent is 90 days overdue. It remains to be seen whether this period will be extended with effect from the end of June 2020 if full lockdown remains in place at that point as it seems unlikely that pubs and restaurants are going to be able to open for many months to come causing further arrears to accrue.
Notwithstanding these measures, rent will continue to accrue and there will come a time when accrued arrears will have to be paid. At this point we will presumably see either an increased demand for borrowing under the Coronavirus Business Interruption Loan Scheme or businesses throwing the towel in and entering a formal insolvency process. It is hard to imagine Landlords agreeing the write off the debts with many of them facing their own financial challenges.
The government seems to acknowledge that there is a balance to be struck between the protection offered to tenants and the position of landlords and urges tenants to pay rent where they can. The government expects landlords and investors to work collaboratively with high street businesses who are unable to pay their bills during the coronavirus pandemic and although the government acknowledges that landlords could themselves face hardship as a result of the new measures it appears to regard the option of a loan under the Coronavirus Business Interruption Loan Scheme as the solution. This will not be an attractive option to landlords in the face of uncertainty as to whether the arrears will ever be paid, leaving them exposed to liability for the 20% not currently guaranteed by the government.
As always, the devil will be in the detail as and when the draft Bill is published. The 23rd April 2020 announcement focuses solely on rent so it will be interesting to see whether the measures introduced by the Bill extend to other commercial debt. It goes without saying that a substantial reduction in winding up petitions will mean a significant reduction in work for insolvency professionals.