Tuesday, 28 April 2020

COVID-19: No Winding Up Commercial Tenants

The government is introducing measures to protect commercial tenants from aggressive rent collection during the coronavirus pandemic.

Statutory demands and winding up petitions weren’t included in the temporary moratorium introduced by the Coronavirus Act 2020, which suspends the right for landlords to forfeit commercial leases for non-payment of rent until 30 June 2020.

The government announcement says that whilst most landlords and tenants are working well together to reach agreements on debt obligations, some landlords have been putting tenants under undue pressure by using aggressive debt recovery tactics.

To stop these unfair practices, the government is temporarily banning the use of statutory demands (made between 1 March 2020 and 30 June 2020) and winding up petitions presented from Monday 27 April, through to 30 June 2020, where a company cannot pay its bills due to coronavirus.

The measures will be included in the Corporate Insolvency and Governance Bill.

The announcement specifically refers to “high street shops and other companies under strain” and the commentary in the announcement says it extends to both the retail and hospitality business. It also refers generically to “commercial tenants”. It’s therefore unclear at present whether this will cover all commercial tenants, as the temporary moratorium on forfeiture does, or be restricted to those sectors.

Any winding-up petition that claims a company is unable to pay its debts must first be reviewed by the court to determine why.

The new legislation 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.

So, it’s not an outright ban, although it will surely be difficult for any landlord now to contemplate such action.

It will be interesting to see how the new law will attempt to frame a distinction between those who can and those who cannot afford to pay their rent.

There is also no mention of any restrictions on applications to court for the appointment of administrators (which any creditor can do). Perhaps this will also be included in the new legislation? If not, it still potentially leaves corporate tenants exposed.

The new legislation to protect tenants will be in force until 30 June 2020,and can be extended in line with the moratorium on commercial lease forfeiture.

The government is also making changes to the use of Commercial Rent Arrears Recovery (CRAR) during the pandemic.

Secondary legislation will provide tenants with more breathing space to pay rent by preventing landlords using CRAR unless they are owed 90 days of unpaid rent.

Although the so-called “breathing space” won’t help tenants who pay their rent quarterly.

So far, the temporary measures introduced by the government have not taken account of the pressures landlords are now under to meet lending covenants.

The Financial Conduct Authority, the Financial Reporting Council and the Prudential Regulatory Authority have issued a joint statement encouraging investors and lenders to take into account the issues arising directly from the COVID-19 pandemic in responding to potential breaches of covenants.

The temporary measures described above do not affect a landlord’s entitlement to add interest to unpaid rent if the lease permits; sue the tenant and/or any guarantor for the debt; or withdraw sums held on rent deposit.

Tenants must also remember that this isn’t a rent holiday.

Landlords will still be owed rent and other payments at the end of the moratorium period.

If a tenant requires a rent holiday or rent suspension provisions, it will need to negotiate them with its landlord and agree a side letter or variation of the lease.

Whether landlords will agree to such concessions will be at their discretion, although they may themselves be constrained in reaching agreement by the financial covenants and other provisions in their own lending agreements and any superior lease.

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