July 5, 2020

Volume X, Number 187

July 03, 2020

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UK Government proposes measures to curb “aggressive” rent collection strategies

At the end of March, the Government introduced measures providing a moratorium on evictions for commercial tenants for non-payment of rent until 30 June 2020. Although landlords were unable to evict tenants, there was no automatic rent holiday and tenants still remained liable to pay rent, which prompted many commercial discussions between landlords and tenants to introduce rent holidays and payment plans. However, some landlords began to take more drastic action to recover debts owed to them, in particular by issuing statutory demands and winding-up petitions.

Yesterday, Alok Sharma announced further measures to protect commercial tenants from these “aggressive” rent collection strategies and to “safeguard the UK high street”.

What is Proposed?

The Government is proposing that statutory demands and winding-up petitions issued to commercial tenants will be temporarily voided. The ban is expected to apply where a company cannot pay their bills due to COVID19.

Petitions presented under section 122(1)(f) of the Insolvency Act 1986, i.e. the ground that a company is unable to pay its debts as they fall due, will first be reviewed by a court to determine why a company is unable to pay its debts. If it appears that this inability to pay debts is the result of COVID19, the petitions will not be able to be presented and no winding-up order will be made.

It is not clear at what point this court review will take place (i.e. will it be prior to issuing the winding-up petition and paying the substantial official receiver fees and filing fees, which amounts to just under £2,000?) and it is unclear how this assessment will be undertaken. Will the petition need to set out why the company is unable to pay its debts (and will a landlord even have this information)? Will there be a hearing (remotely)? Will both parties be required to make submissions? How much review will a court undertake?

In the current climate, it is hard to find a company not impacted by COVID19 in some way and, particularly with retail tenants, it seems that courts would be acting boldly to determine that the inability was not due to COVID19.

Impact on Existing Petitions

As set out in our previous blog, there have been numerous delays in the winding-up landscape and further changes made by the temporary insolvency practice direction (TIPD). As a result, most petitions up to 21 April 2020 were adjourned and petitions to be heard after that date will be listed and re-listed according to urgency and when the petition was adjourned. Therefore, it could be months before an order on a petition is made.

Unfortunately, the proposals leave companies and commercial tenants who are already subject to winding-up petitions in a difficult and uncertain position particularly where the reason for non-payment is Covid-19 related.

Under the new proposals, no winding-up orders will be made where the inability to pay is due to COVID-19, so a petition presented weeks or even months before the hearing (or the introduction of the new measures) may be impacted. It is not clear what this impact will be –  will the petition be automatically void if the reason for non-payment is COVID-19 related (as new petitions presented may be) or will the Court simply dismiss the petition (in which case who pays the costs?) or will it be adjourned?  There is the added difficulty for tenants of making any payments whilst there is an outstanding winding up petition given the impact of s127 of the Insolvency Act 1986.

S127 states that, in a winding up by the court, any disposition of a company’s property made after the commencement of the winding up is void unless the court makes a validation order in relation to the transaction. This applies to any disposition of the company’s property from the presentation of the winding-up petition (but only if a winding-up order is made).

Companies can obtain validation orders, but this may now take longer (particularly as some Courts are not dealing with these on an urgent basis), so companies are left in a state of limbo and uncertainty.

In addition, banks may freeze accounts once a petition is advertised in the Gazette, so a company may be prevented from trading or paying creditors at all, leaving it vulnerable to enforcement action from other creditors.

Impact on Landlords

The announcement asks for landlords to give forbearance to tenants, but also requests that tenants “pay rent where they can afford it” or “pay what they can” in recognition of the difficulties faced by landlords. However, in the absence of any real enforcement powers of landlords, tenants may divert the cash they do have available elsewhere to cover other demands and landlords may be left out-of-pocket.

Landlords could issue a petition now, but they risk the costs of presenting a petition if it is not heard before the new measures are introduced and given the delays in the system outlined,  the likelihood is that the petition will not be heard until the measures are in force and then there is the risk that an order will not be made.

It is of course open to landlords to issue a petition but they would need to be confident that the reason for non-payment is not COVID-19 related to avoid the petition being dismissed.  Where the landlord is a retail landlord, and given many retailers have had to close their doors due to Government restrictions, the chances of those landlords demonstrating that the reason for non-payment was not due to COVID-19 is slim. There have been no further announcements of measures to support landlords, who are themselves experiencing their own pressures and concern about meeting their obligations. Landlords are instead directed to the Government support measures already in force and a slight reassurance that the Government is “working with banks and investors to seek ways to address these issues and guide the whole sector through the pandemic.”

When will this come into force?

The changes to presentation of winding-up petitions are expected to be included in the Corporate Insolvency and Governance Bill (the “Bill”), which the Government announced on 28 March would be passed “at the earliest opportunity”.

Parliament entered into Easter recess early, on 25 March 2020, and only returned on 21 April 2020, so the Bill has not yet been presented to Parliament. However, the Bill is expected imminently. When enacted, the restrictions on presenting winding-up petitions will be in force until 30 June 2020 and can be extended in line with the moratorium on commercial lease forfeiture.

In addition, the announcement sets out that changes to changes to Commercial Rent Arrears Recovery (“CRAR”) will come into force through secondary legislation. CRAR is a method of seizing tenant property for sale to meet rental debts owed and, under the changes, will only be available to landlords when 90 days or more unpaid rent is owed.

This post was written by Emily Davis.

© Copyright 2020 Squire Patton Boggs (US) LLPNational Law Review, Volume X, Number 115

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