The UK Government has temporarily banned commercial landlords from issuing statutory demands and winding up petitions against commercial tenants unable to pay their bills due to coronavirus. A statutory demand can be issued where a corporate debtor owes £750 to a creditor. If the debt is not paid within 21 days of the issue of the statutory demand, the landlord creditor can then issue a winding up petition against their tenant. Although in most cases a landlord does not ultimately want their tenant to be wound up (as that could lead to them having to take back the premises), the procedure is sometimes used to put pressure on tenants to pay their rent. Under these new measures, any winding up petition that claims that the company is unable to pay its debts must first be reviewed by the court to determine why. The law 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.
In addition, landlords will also be prevented from using commercial rent arrears recovery (taking control of a tenant’s goods) unless they are owed 90 days of unpaid rent. It therefore follows that if tenants are more than a quarter’s rent in arrears, commercial rent arrears recovery could still be available to landlords (as the current March quarter has 91 days).
The measures will be included in the Corporate Insolvency and Governance Bill, which Business Secretary Alok Sharma set out earlier this month. The new legislation will be in force until 30 June, but may be extended in line with the moratorium on commercial lease forfeiture for non-payment of rent which came into force on 26 March 2020.
The Government acknowledged that the “majority of landlords and tenants are working well together to reach agreements on debt obligations” but said that “some landlords have been putting tenants under pressure by using aggressive debt recovery tactics”. The Government stated that the temporary measures are “designed to acknowledge the pressures landlords are facing while encouraging cooperation in the spirt of fair commercial practice”. It also called on tenants to “pay rent where they can afford it” in recognition of the “strains felt by commercial landlords too”.
Communities Secretary, Robert Jenrick said” We understand that landlords are facing their own very serious pressures and are concerned about their position with lenders. We are working with banks and investors to seek ways to address these issues and guide the whole sector through the pandemic”.
As a result of the above measures, landlords will, for the time being, find themselves with fewer options at their disposal to require payment of rents by their tenants. Landlords may therefore be obliged to consider other methods of recovery of rent, such as claiming against guarantors, drawing down on any security (such as rent deposits, bank guarantees) or by issuing a debt claim, which for the time being are not prohibited by the Government’s measures. Although the underlying principles of the Government’s measures are to protect tenants and so secure jobs in the long term, the measures do also have an impact on a landlord’s income in the short term, which in turn can have consequences on a landlord’s financing arrangements and their own cash flow position (and so their ability to protect jobs for their own employees).
We will wait with interest for the publication of draft legislation to fully understand how these new measures will work in practice and be interpreted by the courts.
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