Landlord Solvency vs Survival of Tenant Business - Which will prevail? (And other questions arising from The Commercial Rent (Coronavirus) Bill)

Landlord Solvency vs Survival of Tenant Business - Which will prevail? (And other questions arising from The Commercial Rent (Coronavirus) Bill)

Tenant breathes (brief) sigh of relief following forfeiture of its long lease

The Commercial Rent (Coronavirus) Bill 2021 (the Bill) is expected to come into force from 25 March 2022 – it is intended to introduce an arbitration procedure for commercial rent arrears accrued by businesses during the “protected period” and also to extend the restrictions on the use of winding up proceedings and now to include personal bankruptcy.

The “protected period” relates to business tenancies adversely affected by the pandemic either by enforced closure or restrictions placed on trade. This period – as set out in section 5 of the Bill – runs from:

  • 21 March 2020 to 18 July 2021 for business tenancies in England; and
  • 21 March 2020 to 7 August 2021 for business tenancies in Wales.

In either case, the above end date might be sooner if the COVID-19 restrictions no longer applied to the business earlier.

The new rent arbitration scheme

The referral to arbitration under the Bill relates only to “protected rent debt” which is debt relating to the closure of and/or restrictions on businesses during the pandemic. Such referrals can be made from commencement of the Act (anticipated to be 25 March 2022) and must be made within a period of six months from its commencement i.e. on or before 25 September 2022.

The arbitration award will be aimed at preserving the viability of the business of the tenant whilst at the same time preserving the landlord’s solvency. This is likely to produce a variety of arbitration awards, decided on a case-by-case basis, given the uncertainties of the arbitration scheme alongside the new restrictions on the use of insolvency procedures (see below). The outcome may therefore prove frustrating for landlords, especially as the Bill is clear that no award will be made where the underlying tenant business is not considered viable.

The Bill also allows the referral of ‘protected rent debt’ judgments which have been secured in the period between 10 November 2021 and date the Bill is passed. It will be interesting to see whether landlords who have the benefit of such judgments use the new arbitration scheme, where they are otherwise unable to enforce against a commercial tenant, especially with the new restrictions around the use of insolvency procedures.

It is worth noting that protected rent debt cannot be included by tenants in any CVA, Part 26A restructuring plan or scheme of arrangement after an arbitrator is appointed and for a period of twelve months, beginning when the arbitration settlement is awarded. Further, referrals for arbitration cannot be made in relation to tenants who are subject to or have proposed a CVA, Part 26A restructuring or scheme of arrangement affecting protected rent debt.

The new restrictions on insolvency procedures

The Bill introduces a moratorium period in which landlords are still not able to pursue commercial tenants for forfeiture, winding-up and Commercial Rent Arrears Recovery for protected rent debts – this period runs for six months from the commencement of the Act (as above, anticipated to be 25 March 2022) and therefore anticipated to run until 25 September 2022. Additionally, during the “moratorium period” no bankruptcy petition can be presented for protected rent debts.

Although a landlord can serve a statutory demand against a tenant company for commercial rent arrears (whether or not the debt relates to protected rent debts), it cannot issue a winding-up petition until after 31 March 2022 in the case of non-protected rent debts which are categorised as “excluded debt” under the Corporate Insolvency Governance Act 2020 (CIGA); here, “excluded debt" covers any commercial rent arrears which are unpaid by reason of a financial effect of coronavirus. As landlord creditors from 1 April 2022 will be able to issue a winding-up petition for non-protected rent debts, one might expect a plethora of statutory demands being served in early March 2022 (in readiness for 1 April).

In relation to non-corporate tenants, landlords can no longer - since 10 November 2021 so of retrospective effect - present a bankruptcy petition (and no bankruptcy order can be made) based on any judgment debt or a statutory demand served in relation to protected rent debts until the end of the moratorium period, that is for six months after the commencement of the Act (i.e. anticipated to be until 25 September 2022). This is a completely new restriction, as CIGA did not previously prohibit the use of bankruptcy proceedings.

It is also not clear whether any further extensions of the Bill are intended to be implemented. The Bill is currently capable of extension and we will likely see such extensions if there are any more periods of closure as a result of the pandemic.

Tim Carter, Partner and co-head of restructuring and insolvency at Stevens & Bolton, comments:

“It will be interesting to see how the arbitration framework works at striking a balance between preserving the viability of the business of the tenant while preserving the solvency of the landlord, and who will be expected to carry the burden of the costs of the arbitration?

Struggling commercial landlords will understandably see the extended deadlines imposed by the new moratorium on already ‘ring-fenced’ rent arrears as a further blow to recovery. In particular, landlords who have already secured bankruptcy orders after 10 November 2021 against their commercial tenants will no doubt be flabbergasted to learn that their bankruptcy orders are void!  This will separately present its own challenges, including for example who is liable to pay the costs of the voided bankruptcy proceedings?”

For further information on the Bill, please also see the article prepared by our Property Disputes team headed “Five things you need to know”. 

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