25 August 2020 - Events
The government has, since March of this year, introduced a number of measures to protect occupiers from the impact of the crisis caused by pandemic. The initial measures, brought into force by emergency legislation in March, restrict options available to landlords for recovery of rent arrears. The measures have been extended in recent days.
The measures in summary
The measures suspend the right to forfeit a lease for non payment of rent and other sums due from the tenant. The initial moratorium on forfeiture (introduced on 25 March 2020 by the Coronavirus Act 2020) effectively suspended the landlord’s right to forfeit a lease for non-payment of the March quarter’s rent until 30 June 2020. On 29 June, that moratorium was extended to 30 September 2020, suspending the landlord’s rights to forfeit a lease for non payment of both the March and June quarter’s rent.
Existing and new possession proceedings
A court practice direction introduced on 27 March ‘stayed’ all possession proceedings (whether commenced before or after that date), initially for a period of 90 days (expiring on 25 June 2020). The stay was wide ranging, and prevented any steps being taken in court proceedings for possession of property, whether based on a failure to pay rent or other grounds. The stay also applied to the enforcement of all existing orders for possession, preventing landlords obtaining physical possession after 27 March where there was an existing right to possession.
The stay has recently been extended to 23 August 2020. The extension applies to all possession proceedings and the enforcement of possession orders with limited exceptions relating to claims for possession against trespassers.
Commercial Rent Arrears Recovery (‘CRAR’)
On 25 April 2020 further statutory measures were introduced restricting landlords’ ability to use CRAR, the procedure allowing landlords of commercial premises to recover rent arrears by taking control of tenants goods and selling them. Landlords wishing to enforce payment of rent through CRAR must do so through an ‘enforcement agent’, who must serve a ‘notice of enforcement’ on the tenant, giving at least 7 days’ notice that the agent intends to take control of the tenant’s goods. When the notice expires, the agent may enter the premises to take control of the tenant’s goods to the value of the rent arrears and costs.
The regulations introduced on 25 April 2020, increased the minimum amount of rent that must be in arrear before CRAR becomes available from 7 days’ rent to 90 days’ rent where notice of enforcement is given between 25 April and 30 June 2020.
Further regulations which came into force on 24 June 2020 increase the minimum amount for the exercise of CRAR from 90 days’ to 189 days’ rent in respect of any notice of enforcement served between 26 March 2020 and 23 August 2020. The practical effect of the regulation is to suspend the use of CRAR in respect of the March and June quarters’ rent until after 23 August 2020.
Corporate Insolvency and Governance Act 2020
A package of measures were introduced on 26 June 2020 by the Corporate Insolvency and Governance Act 2020. The headline points relate to:
1. Liquidation of companies
‘Statutory demands’ are sometimes used to exert pressure on tenants to pay outstanding liabilities. The failure to satisfy a demand enables a landlord to commence court proceedings to put the company into liquidation. The threat of liquidation is often sufficient to persuade the tenant to pay.
The new Act suspends the use of a statutory demand for this purpose. Proceedings to liquidate a company cannot be commenced for failure to satisfy a statutory demand served between 1 March and 30 September 2020.
The Act also effectively stays proceedings to wind up a company until 30 September 2020. This applies retrospectively to proceedings commenced on or after 27 April 2020. A creditor can only pursue proceedings before 30 September on the basis that a company cannot pay its debts as they fall due if he has reasonable grounds for believing that:
1.1 Coronavirus has not had a financial effect on the company; or
1.2 the company would have been unable to pay its debts even if Coronavirus had not had a financial effect on it.
In many cases, it will be difficult to establish that the company’s failure to pay its debts is not due to the pandemic, and so for practical purposes landlords will be unable to pursue proceedings until after 30 September 2020.
2. A new moratorium
In addition to the temporary restrictions on liquidation, the Act also introduces permanent changes to Insolvency law, including the introduction of a ‘moratorium’ to enable companies to obtain a ‘payment holiday’ in respect of rent and other debts. The purpose of the moratorium is to save the company as a going concern. The directors can obtain a moratorium under the supervision of a licenced Insolvency Practitioner who must monitor the moratorium to ensure its purpose is being achieved.
The moratorium can be obtained by filing certain documents with the court, or by an application to court. These must include a statement by the directors that the company is or is likely to be unable to pay its debts, and a statement by the Insolvency Practitioner that in the monitor’s view, it is likely that the moratorium will rescue the company as a going concern.
Most companies are eligible to seek a moratorium. However, companies which are already subject to formal insolvency proceedings, or who have in the 12 month period before the filing been subject to an insolvency moratorium are excluded from eligibility.
There is an initial moratorium which provides 20 business days’ protection from certain claims, which can be extended for a further 20 business days provided the company has paid its debts for which there is no payment holiday. A longer extension can be obtained with the consent of creditors or the Court.
The effect of the moratorium is to give the tenant a payment holiday in respect of rent and other sums due under the lease in respect of a period before the commencement of the moratorium. However, the moratorium does not extend to rent in respect of a period during the moratorium. Where a rent payment date falls before the start of a moratorium but the instalment covers a pre-moratorium and moratorium period, the implication is that the rent payment should be apportioned (the tenant paying that part of the rent due for the moratorium period).
There are a number of restrictions on enforcement during a moratorium, which in summary are:
- that a lease cannot be forfeited by peaceful re-entry, except with the Court’s permission;
- that legal proceedings cannot be commenced or continued for non-payment of sums due from the tenant, although the Court may give permission to pursue proceedings to recover rent not subject to a payment holiday;
- that legal process cannot be commenced or continued against a tenant’s property (so that a landlord cannot use CRAR), unless the court gives permission in relation to rent not subject to a payment holiday;
- restrictions on insolvency proceedings against the tenant during the moratorium.
Although the Act restricts the enforcement of security over a company’s property during the moratorium, a landlord may still be able to enforce a rent deposit. This will depend on how the deposit arrangement is structured and the terms of the rent deposit deed.
To date, landlords have been willing to consider requests by tenants for payment holidays during the crisis. However, they may be less willing to agree to defer rental payments where a further payment holiday could be imposed by a moratorium without their consent.
As matters stand, in the absence of a moratorium, landlords can sue for unpaid rent whilst their rights to enforce payment through possession proceedings, CRAR, and insolvency proceedings have for practical purposes been suspended until September of this year.