Update on COVID-19 Measures: Commercial Debts and Rent Arrears

We summarise the current position on winding up petitions (used to place a company into insolvency) and commercial rent arrears.

We have written previously about various measures introduced by the government to assist businesses and their owners during the pandemic. Most of those have been in place since the beginning of lockdown in March 2020, but after multiple extensions over the last 18 months, a significant number have since come to an end. In some areas, the government is introducing targeted short term measures which are due to last until 31 March 2022. Here, we summarise the current position on winding up petitions (used to place a company into insolvency) and commercial rent arrears.

Winding Up

On 1 October 2021, the restriction on the presentation of winding up petitions came to an end. Some restrictions remain for landlords of commercial property, but winding up petitions will once again be a viable tool for many creditors. Although, legally, such petitions should not be exploited as a method of debt collection, they are commonly used by creditors for that very purpose.

The change will be welcomed by those who are owed money, but some protections remain in place, mainly designed to protect smaller businesses.

Firstly, despite the end of the restrictions, the threshold to present a winding up petition has increased from £750 to £10,000 (unless the creditor has an unsatisfied judgment). The cost of presenting a petition has always meant smaller debts are not viably enforced in this manner, but new legislation forces this issue.

Secondly, the debt which is the subject of a winding up petition must not be for rent (or similar payments such as service charge) arising from a business tenancy. New rules in relation to such debts are discussed below.

Thirdly, before winding up, the creditor must serve a new notice (with a 21 day deadline) asking for the debtor for proposals for repayment. In practice, this is likely to be another administrative hurdle but in most cases will run alongside the deadlines of a statutory demand. However, if the petition is presented, the creditor also has to summarise the justification for refusing the debtor’s proposal for repayment. That will obviously lead for scope for debtors to argue that a creditor’s actions are unreasonably, and in practice is likely to force creditors to consider reasonable offers, and result in court’s allowing further time for those debtors to pay if the issue is forced.

Landlords and Tenants

Tenants of commercial property have for a long time enjoyed protection from landlords pursuing rent arrears arising from business tenancies. The government is in the process of introducing a new rent arrears arbitration scheme which will ring fence commercial rent arrears accrued during the pandemic. The measures are set out in legislation currently working its way through Parliament – the Commercial Rent (Coronavirus) Bill and revised Code of Practice for Commercial Property Relationships.

The Code has been in place from early on in the pandemic, and sets out a set of standards which both landlords and tenants are urged to adhere to in order to reach agreement on pandemic-related arrears of rent.

The new Bill will establish a binding arbitration process in England and Wales for commercial landlords and tenants who are unable to reach such an agreement on rent arrears. If enacted, the Bill will apply only to rent arrears on business tenancies during the period between 21 March 2020 and 18 July 2021, during which a tenant was obliged under COVID-19 regulations to close the whole or part of its business.

It is not anticipated that the Bill is likely to be enacted until late March 2022, but in the interim, “twilight” provisions will apply:

  1. The moratorium on forfeiture for non-payment of rent (and restrictions on use of CRAR) will remain in place until 25 March 2022
  2. Landlords can still issue a money claim for rent arrears, but once the Bill is passed, the tenant (and any guarantor) can apply for a stay of the claim if the debt is covered by the Bill. The case of Re A Company [2020] EWHC 1406 (Ch) has also indicated that it is likely tenants could even apply for a stay of court proceedings pending the introduction of the legislation.

It remains to be seen what the final form of the Bill will look like, but it seems certain that a binding arbitration process will be enforced in some form. One obvious question is how the balance between the interests of landlords and their tenants will be met? At this stage, the Bill states the objective of the arbitration process as to preserve and restore “the viability of the business of the tenant, so far as that is consistent with preserving the landlord’s solvency”. A lot of commentators anticipate this being weighted in favour of the tenant, but the full impact of those measures remains to be seen.

Any existing agreements between parties will not be affected and the Bill will not apply to rent which has already paid by a tenant; only unpaid rent. Landlords may wish to take action now to review what measures they can take (if any) to secure rent arrears before the scheme is enforced. On the other hand, most tenants’ interests are likely to be best served by waiting.

Picture of David Hitchcock, Partner and Head of Dispute Resolution

David Hitchcock, Partner and Head of Dispute Resolution

We summarise the current position on winding up petitions (used to place a company into insolvency) and commercial rent arrears.

Update on COVID-19 Measures: Commercial Debts and Rent Arrears

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