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28 Apr 2020

Fresh restrictions on pursuing rent arrears

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The Government has just announced that it will introduce restrictions on landlords pursuing commercial tenants for rent arrears.  These are in addition to the restrictions on forfeiture for non-payment of sums due under a lease imposed in March by section 82 of the Coronavirus Act 2020.

At the moment we only have a loosely drafted press release to go on. It is difficult to advise with precision until the draft legislation is published. 

In summary, there are two aspects to the announced restrictions:

1. The government will temporarily ban the use of statutory demands and winding-up petitions/orders where a company cannot pay its bills due to coronavirus.

This will apply to statutory demands made between 1 March and 30 June 2020 and winding up petitions presented between 27 April and 30 June 2020.

What this means 

  • The key words here are “cannot pay their bills due to coronavirus. This suggests that these steps will be prohibited only when:

    (i) a tenant cannot pay its bills and 

    (ii) that inability is due to coronavirus.

  • Assuming so, we will need to see how literally the courts interpret the words “cannot pay”. Does the tenant actually have to be unable to pay?  Most tenants could argue that their cash position has been constrained by the lockdown. 

  • The other point is whether the “inability to pay” is due to Covid-19. Where a tenant was already in difficulty before Covid-19 this may not apply. For example if they had arrears going back further than March 2020, a landlord might argue that the inability to pay is due to other factors. 

Practical implications 

  • The restrictions are not yet law. They will be included in the Corporate Insolvency and Governance Bill which has not yet even been published, let alone enacted. In the meantime, there is no law preventing landlords from continuing to threaten to issue and advertise winding-up petitions (although the restrictions are likely to be in force by the time the petition is heard). The threat of the petition being advertised is frequently sufficient to prompt tenants to pay.

2. Landlords will be prevented from using CRAR unless they are owed 90 days of unpaid rent. 

 It follows that CRAR is still available if tenants are more than a quarter’s rent in arrears. 

 Practical implications 

  •  This restriction is likely to come into play very quickly, as the press release says that this will be done by secondary legislation.  

What options are left for landlords? 

Once these restrictions are in force, landlords can still:

  • Attempt to petition the winding-up of companies who can pay, but choose not to (depending on the precise wording of the law, and the practice of the courts); 
  • Issue a straight debt claim, and then enforce it by seizing a known bank account or obtaining a charging order over property. However this is likely to be a slow process;

  • Threaten to forfeit leases where there is a breach of non-financial covenants – assuming, that is, that a landlord really wants its property back at this time (and subject to service of a section 146 notice); or

  • Wait until the restrictions are lifted, and then forfeit or petition in respect of all arrears, plus interest at the rate prescribed in the lease. 
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