Many businesses suffered from business interruption during the pandemic, or were forced to close temporarily, making it hard for them to meet their rent obligations.
With the UK Government recently announcing an extension of official protection against such businesses being evicted, we look at what that means for both businesses and landlords.
When does the new protection end?
The government recently announced it will extend eviction protection for business tenants in England and Wales up to 25 March 2022.
What has been agreed?
As part of this initiative, there will be new rules established to ringfence Covid-19 commercial rent arrears and help tenants and landlords to agree repayment plans. These rules have not yet been finalised or published, but Communities Secretary Robert Jenrick said: “This special scheme will ensure many viable businesses can continue to operate" and "debts accrued as a result of the pandemic are resolved to mutual benefit swiftly.” He added that the government has committed £350bn of support for businesses. The existing measures include a ban on forfeiture of commercial premises for rent arrears, and substantial changes to the rules on bailiffs’ ability to seize tenants’ goods under Commercial Rent Arrears Recovery (CRAR).
Why did the government extend the ban?
The government is obviously keen to ensure that businesses which are still unable to open or operate normally have enough time to come to an agreement with their landlord without the threat of eviction. This means that the huge number of businesses that have been affected by the pandemic and are unable to pay rent on their commercial property will continue to be protected from eviction, which in turn will hopefully give them the breathing space they need, while also helping to protect jobs. UKHospitality’s CEO Kate Nicholls said: “This legislation will form a strong bedrock for negotiated settlements […] we are pleased that the government has listened to our sector, and acted to ease its plight by bringing in an equitable solution where both landlords and tenants share the pain.”
Which businesses does the ban apply to?
The extension applies to all businesses, but the new measures that will be introduced by legislation will only cover those impacted by closures. 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.
What happens to unpaid rent that has built up?
Legislation will be introduced in this parliamentary session to ringfence outstanding unpaid rent that has built up when a business has had to remain closed during the pandemic. This is especially relevant for places such as nightclubs and other hospitality businesses.
What about landlords?
Landlords will be expected to make allowances for the ringfenced rent arrears from these specific periods of closure and to share the financial impact with their tenants. The forthcoming legislation intends to help tenants and landlords work together to come to an agreement on how to handle the money owed, and the announcement suggests this could be done by waiving some of the total amount or agreeing a longer-term repayment plan.
What is the position if no agreement is reached?
If in some cases, an agreement cannot be reached, the new law will ensure a binding arbitration process will be put in place so that both parties can come to a formal agreement. Arbitration will be delivered by private arbitrators, but they will have to go through an approval process to prove their impartiality. So as to be fair to landlords, the government has made it clear that businesses that are able to pay rent, must do so, and that tenants should start paying their rent as soon as restrictions change and they are given the green light to open.
What about legal action?
Temporary measures brought in to support certain businesses from insolvency during the pandemic started to be phased out from 1 October 2021.
Limited companies in financial distress as a result of the pandemic have been protected from creditor action since June last year, through the Corporate Insolvency and Governance Act 2020 (CIGA). This was to ensure that viable businesses affected by the restrictions on trading during the lockdown periods were not forced into insolvency unnecessarily. As the economy returns to normal trading conditions, the restrictions on creditor actions are being lifted.
New measures have now been brought in to help smaller limited companies get back on their feet and give them more time to trade their way back to financial health before creditors can take action to wind them up. This will particularly benefit high streets, and the hospitality and leisure sectors, which were hit hardest during the pandemic.
The new legislation, the CIGA 2020 (Coronavirus) (Amendment of Schedule 10) Regulations 2021 ('the new regulations'), came into force on Wednesday 29 September 2021 and substituted a new Schedule 10 into CIGA.
The Insolvency Act 1986 ('the 1986 Act') specifies the grounds upon which registered and unregistered companies may be wound up by the court. One of those grounds is that the company is unable to pay its debts. The 1986 Act specifies those cases where a company is deemed to be unable to pay its debts.
As originally enacted, Schedule 10 to CIGA prohibited the winding up of a company where it would otherwise have been deemed unable to pay its debts as a result of an unpaid statutory demand, and restricted the winding up of a company by a creditor in any of the other cases specified in the 1986 Act, where the company’s inability to pay its debts was due to the financial effect of coronavirus.
The new regulations now provide that a winding-up petition may not be presented by a creditor on the grounds that a company is unable to pay its debts unless certain conditions are met:
- The debt is for a liquidated amount which has fallen due for payment and does not relate to non-payment of rent under a business tenancy.
- The creditor has made a formal request to the company seeking proposals for the payment of the debt.
- The company has not made a proposal that is to the creditor’s satisfaction within 21 days beginning with the day the formal request was delivered.
- The debt is £10,000 or more, or, where the petition relates to two or more debts, the total amount of all of the debts taken together is £10,000 or more.
The court has the power to waive the requirement for creditors to serve a formal request seeking proposals for payment of the debt or to shorten the period within which such proposals are to be submitted.
The new regulations only apply in respect of winding-up petitions that are presented by a creditor between 1 October 2021 and 31 March 2022.
As forfeiture, CRAR, and the ability to commence winding-up proceedings, have all been temporarily altered or suspended as set out above. Where a commercial tenant fails to pay the rent due under a lease, the only things a landlord could do are:
- Pursue the tenant or any guarantor for the rent by way of court action.
- Commence bankruptcy proceedings, but only if the tenant is an individual, the amount of the arrears is greater than £5,000, and the amount is not in dispute. Clearly any landlord will need to consider whether this is a sensible way forward.
- Forfeit for breaches other than the non-payment of rent. However, in order to forfeit a lease for breaches other than the non-payment of rent, first a s146 notice must be served, setting out the breach and giving an opportunity, where appropriate, for rectification. Then an application to court for possession must be made. A landlord cannot forfeit by peaceable re-entry for these sorts of breaches. The landlord is not, however, prevented from enforcing a right of re-entry for a breach of other covenants or denial of the landlord’s title.