Commercial Property: Emergency legislation update

Summary

The main change in the new Act is a three-month moratorium (terminating on 30th June 2020) on the issuing of new possession proceedings, but there have also been other changes such as winding up petitions being postponed for the same period. These have a number of implications for landlords, but the overall aim by the government has been to encourage engagement between landlords and tenants to find negotiated solutions to the current situation and resolve disputes.

The main suggested changes to the insolvency laws are a moratorium on businesses being put into administration by creditors and a temporary suspension of wrongful trading laws so that company directors will not face the risk of personal liability in continuing to trade when not able to pay all debts.

Landlord & Tenant Law: Forfeiture delayed only

The Coronavirus Act 2020 delays the landlord’s ability to exercise its right to forfeite (terminate) a lease for non-payment of rent against a business tenant during the period commencing 26th March until 30th June 2020. The government has the power to extend this (more than once if necessary).

It is important to note that this does not change the tenant’s obligation to pay the rent and the landlord is free to pursue other enforcement action and can add a claim for interest and costs (if provided for by the lease), which could potentially significantly increase the claim.

The postponement also applies to any ongoing court orders made relating to forfeiture proceedings for non-payment of rent. No court orders will be made requiring a tenant to give possession to a landlord of premises prior to the expiry of 30th June or any longer postponement period. At Elliott Matthew we believe it is likely that there will be at least one additional quarter during which ending a tenant’s lease will be banned.

Rents are still due

It is worth noting that there is no means test on whether or not a tenant can pay his rent, and anyone is free to take advantage of the new Act. However, once the postponement period has expired a tenant will be required to pay all of the rent due from the preceding period where the rent was not paid in order to avoid forfeiture. It does not create a rent-free period; all business tenants remain liable for the rent. A tenant should consider how they will manage their cash flow after the postponement period ends in order to meet those rent liabilities.

Rent includes any sums due under a lease, so not just annual rent but also service charge, insurance rent and other outgoings. Also of benefit, is that in future lease renewal proceedings, non-payment during the postponement period will not be a ground for opposing a new lease.

What the Act does not do

While the Act protects tenants against forfeiture, there are a number of actions that the Act does not prevent the landlord from:

• initiating court proceedings for a money judgment (CCJ).
  
• using a tenant’s rent deposit to cover the rent payments.
  
• making a claim for the rent against a guarantor.
  
• initiating Commercial Rent Arrears Recovery (CRAR): This allows a landlord after serving a 7-day notice to enter the rented premises and seize assets of the tenant of an amount equivalent to the rent owed. There are some clear practical issues here in the current lockdown environment.
  
• issuing a statutory demand in relation to unpaid rent as a first step towards threatening winding up proceedings.
  
• issuing a rent diversion notice: if a subtenant is in occupation a landlord can serve a notice to require a subtenant to pay the rent direct to the landlord missing out the direct tenant.
  
• applying pressure by other means. The Act does not restrict forfeiture actions for other reasons, such as insolvency or for breach of the repair/redecoration, keep open clauses or other obligations (although landlords can expect the courts to scrutinise such actions very carefully).

Leases that are under 6 months in length, tenancies at will, licences and other interests that would normally fall outside the provisions of Part 2 of the Landlord and Tenant Act 1954 will not be covered by the Act.

Insolvency Law: proposed changes

Threatening or commencing insolvency action is a useful tool for landlords looking to recover rent arrears but involves brinkmanship. Insolvency can be a risky approach if it tips a tenant into liquidation or bankruptcy. At the end of March, the government announced significant planned changes to UK insolvency law to help companies and directors weather the economic storm caused by the current emergency.

These measures are planned to include a new temporary moratorium for businesses undergoing a restructuring process. The aim of this would be to prevent creditors putting companies into administration and would allow them to continue accessing supplies and raw materials.

Also, there is planned to be a temporary suspension of wrongful trading laws. This would mean that directors would not face the risk of personal liability in continuing to trade, although their duties will remain in force. Directors will most likely still have a duty of care to creditors.

The insolvency legislation is planned to be introduced at the earliest opportunity, although Parliament is in recess until 21st April 2020. In the meantime, the use of winding-up petitions by creditors has essentially been halted by virtue of the English High Court adjourning all winding-up petitions usually for 3 months, with creditors who wish to continue pursuing their petitions having to file special pleadings to seek the Court’s leave to continue.

Please contact Edward Jones at Elliott Matthew Ltd on 07876 255398, edward@eml.legal if you require advice on the above issues or any real estate, insolvency or disputed debt matters.

This note was written on 7th April 2020. This content is provided free of charge for information purposes only. Events are moving fast, and the law and its interpretation are changing rapidly. This note does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by the author or Elliott Matthew Ltd.