Property and Insolvency update on COVID restrictions
On 16 June 2021, the Government announced its intention to extend the existing restrictions relating to:
- statutory demands and winding up petitions;
- rent related forfeiture of business tenancies; and
- commercial rent arrears recovery actions.
It also proposed a new act of parliament to deal with accrued rent arrears of businesses which shut down during the pandemic.
The insolvency restrictions are being extended to the 30 September 2021.
The existing restrictions on statutory demands and winding up petitions are being extended by 3 months from 30 June to 30 September 2021.
You will recall that the restrictions affect all types of creditor and protect all types of debtor company including foreign companies and partnerships.
However, the restrictions do not protect individual debtors from personal statutory demands and bankruptcy proceedings. It is worth noting that if the debtor is an unincorporated commercial tenant or a sole trader operating a business, they are deemed as being individual debtors and are not protected by the restrictions.
Statutory demands served on corporate debtors before the 1 October 2021 cannot be relied upon as the basis for a winding up petition unless the Petitioner can satisfy both points below:
- Satisfy the court’s usual criteria for winding up a company i.e. broadly that the company cannot meet its debts as they fall due pursuant to section 123 (1)(a)(b)(e)/(2) of the Insolvency Act 1986; and
- Demonstrate that they have reasonable grounds for believing that the statutory criteria set out in (i). above would have arisen, irrespective of the company’s worsening financial position caused by the coronavirus. In other words, the coronavirus was not the cause of the insolvency.
The Government’s press announcement was silent on the suspension of liability for wrongful trading for company directors and the relaxations for Extraordinary General Meetings and voting arrangements. These are areas where restrictions have previously applied. Some legal commentators believe that these will be extended by a further 3 months also. However, there is nothing confirmed here yet.
Restrictions on rent related forfeiture of business tenancies are extended to 25 March 2022.
The existing restrictions on the forfeiture of business tenancies are to be extended by almost 9 months from 30 June 2021 to next year’s March quarter date, 25 March 2022.
You will recall that the relevant period for this statutory restriction began on 26 March 2020. During the relevant period, a landlord may not forfeit a relevant business tenancy on the grounds of non-payment of rent.
However, the right of the landlord to forfeit is preserved, meaning that most landlords (if so inclined) would be able to proceed to forfeit their tenants’ leases on the day after the restrictions are lifted.
The restrictions only apply to forfeiture for non-payment of rent and forfeiture for other reasons may still go ahead e.g. for other breaches of the lease.
Rent is defined under section 82 of the Coronavirus Act 2020 as including any sum which a tenant is liable to pay under a relevant business tenancy.
In the Government’s press release, it states its reasons for the extension are to “ensure that the sectors who are unable to open have enough time to come to an agreement with their landlord without the threat of eviction”. While the wording refers to “sectors”, the extension applies universally.
The restriction on commercial rent arrears (CRAR) are being extended to 25 March 2022.
The existing restrictions on landlords exercising CRAR will be extended by almost 9 months to 25 March 2022.
During the relevant period, which started on 25 April 2020, a landlord is unable to exercise CRAR in the absence of certain levels of rent arrears.
When the restriction was first enacted, the minimum amount of rent arrears required to use CRAR was the equivalent of 90 days. That minimum threshold was then increased by a further 3 months and most recently, the minimum rent arrears was extended to approximately 6 quarters’ worth of rent (544 days) for any intended CRAR from 24 June 2021.
Despite this restriction now being extended by 9 months to 25 March 2022, the minimum threshold of approximately 6 quarters rent is currently not set to be increased. However, tenants should check that they are still below the circa 6 month period (554 days) if they wish to continue to benefit from the Government’s protections.
When assessing rent arrears, a landlord may not count any VAT or interest. Any set off that the tenant may have must also be taken into account when calculating the minimum amount.
A new act of parliament to deal with accrued rent arrears of businesses forced to shut during the pandemic.
As stated above, the Government’s press release proposed a new act of parliament to address the rent arrears which certain tenants have accrued to date through the course of the pandemic. It refers to such arrears as being “ringfenced” and the intention appears to be to encourage tenants to prioritise payment of new/future rent whilst seemingly maintaining an extended form of protection for the incurred ringfenced arrears. The press release envisages landlords and tenants agreeing repayment plans. Again, the press release refers to “nightclubs and other hospitality businesses”. It also refers to legislation which will help landlords and tenants work together to reach an agreement regarding the money that is owed and it suggests that this could be done “by waiving some of the total amount or agreeing a longer term repayment plan”. The press release then goes on to say that if an agreement cannot be reached, the legislation will introduce “a binding arbitration process”.
The press release states that the new measures will only cover those impacted by closures. It states that this means that “rent debt accumulated before March 2020 and after the date when relevant sector restrictions on trading are lifted, will be actionable by landlords as soon as the tenant protection measures are lifted. The arbitration process will be delivered by private arbitrators but in accordance with guidelines… set out in the legislation”.
As with all Government legislation, this will need to be subject to parliamentary scrutiny and there may be some changes along the way. However, looking at what has gone before, such changes have been minimal.
There are several questions in relation to the proposed legislation and as yet we are still to see a draft. Will it be limited to only certain sectors? What exactly will be ringfenced and what does that mean? How will the arbitrations work? When will it come into effect?
For the time being, the Government remains keen to allow breathing space to those affected by the Coronavirus. The proposed legislation is in line with the Government’s recent “breathing space” regulations [if you are unaware of these, please see our earlier article here: Debt Respite Scheme (Breathing Space): a guide | Prettys Solicitors].
It seems sensible for those affected by these extensions to continue to try and work together in the interim but be ready for when they are lifted – be they debtor or creditor/landlord or tenant. Communication in any dispute scenario is key. Similarly, if, as seems likely, it is expected that the parties are to try and agree a repayment plan – it again seems sensible to begin this process now, in readiness.
Currently, the flood of statutory demands, forfeiture and CRAR which had been envisaged for the end of June would appear to have been postponed for the time being.
Should you have any questions in relation to this article, or its subject matter, please do not hesitate to contact Graham Mead, a partner in the firm’s commercial litigation team, on 01473 298234 or by email at email@example.com.