Commercial landlords banned from aggressive rent collection
Farhana Choudhury, 24th April, 2020
Commercial property landlords are to be temporarily restrained from serving statutory demands or winding up petitions against tenants such as high street shops and other companies, who are unable to pay their rent due to the impact of the coronavirus crisis, the Government’s Business Secretary has announced.
Please see update to this article, published 27 May 2020: Click or tap here.
Part one of a three-part blog for commercial landlords:
The announcement made on 23 April 2020 has been supplemented by a press release which can be found at: https://www.gov.uk/government/news/new-measures-to-protect-uk-high-street-from-aggressive-rent-collection-and-closure.
Whilst this does not yet have legislative affect, we expect that these new measures may well be back-dated as with other insolvency changes resulting from COVID-19 and will remain in force until 30 June (unless extended). The guidance in the press release is framed in terms of the protection of commercial tenants from aggressive rent collection where the coronavirus has prevented them from meeting their payment obligations. The measures, which are due to be included in the Corporate Insolvency and Governance Bill set out earlier this month by the Business Secretary, will prohibit commercial landlords from serving a tenant with a statutory demand or a winding up petition where the tenant’s inability to pay has arisen due to the coronavirus.
Where a creditor serves a statutory demand on a debtor the demand requires payment of a debt within 21 days, if this remains unpaid it enables a creditor to thereafter serve a winding up petition on the debtor requiring it to be wound up by the Court due to its inability to pay its debts. This process is often used by commercial landlords where their tenants have continuously failed to meet rent payments or have become uncooperative or uncontactable when failing to meet a rent payment date, indicating that they may be altogether insolvent.
The press release is brief and is ambiguous on certain practical points. For example it is unclear as to how the UK Government intends to ‘ban’ statutory demands, particularly given there is no court involvement in the service of such a demand on a debtor. It does however, go into some detail on how a winding up petition (which does require Court involvement) will be prohibited. It appears that the measures will implement a new permission stage, wherein the Court will review any winding up petitions to assess why the company has an inability to pay its debts before it is verified for service on the debtor. Where the Court reviews such a petition and finds that the debtor’s inability to pay is due to the coronavirus it will disallow its presentation on the tenant, or refuse to grant a winding up Order against the tenant whilst the measures are in place. The extent to which the creditor will need to address the debtor’s general inability to pay, the extent to which either party may participate in that permission stage and the costs implications of that permission stage are all unclear at present.
An issue the press release does not touch on is whether the guidance prevents the pursuit of wider commercial debts via the statutory demand / winding up petition route, where the debt is as a result of coronavirus. The press release refers to the commercial landlord and tenant relationship throughout and, if the guidance does strictly apply to this relationship, then the measures could potentially be circumvented by a commercial landlord pursuing a guarantor under a commercial lease. Future UK Government guidance may well resolve this ambiguity / gap. Further, the guidance in the press release seemingly fails to recognise that many commercial tenants are not companies, as it does not specify whether these measures will have any impact on commercial leases where the occupying tenant is for example a sole trader, or a partnership. If the new measures apply solely to tenant companies, then there is the potential that not all commercial tenants will be afforded the same protection, even though they are similarly unable to meet rent payments due to the coronavirus. Again, future UK Government guidance may well resolve this ambiguity / gap.
The press release also briefly mentions that the Government is setting out secondary legislation in a bid to provide tenants with more “breathing space” to pay rent by preventing landlords from using Commercial Rent Arrears Recovery unless they are owed 90 or more days of unpaid rent. Whilst it is clear the guidance seeks to predominantly safeguard commercial tenants where required, it does give some recognition to the strains felt by commercial landlords by urging tenants to pay rent where they can afford to or what they can during the pandemic.
It is expected that the guidance will be further clarified and / or changed prior to its implementation and we will keep you updated as to its progression.
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