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Covid 19 - What a commercial tenant needs to know about debt recovery

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In our previous post titled, ‘Covid-19 - What a commercial tenant needs to know about the eviction moratorium’, we discussed the protection afforded to tenants under the Coronavirus Act 2020 against evictions for non-payment of rent. The eviction moratorium has led landlords to resort to other means to recover this quarters rent, namely through debt recovery. The government, wanting to keep businesses afloat post covid-19, has announced plans to bring into effect legislation, to be known as the Corporate Insolvency and Governance Bill as a rescuing measure.

What will the Corporate Insolvency and Governance Bill do?

The proposed legislation will impose a temporary ban on:-

1.statutory demands issued between 1 March 2020 and 30 June 2020;  and

2.winding up petitions presented between

The ban will only apply to tenants who cannot pay their rent due to the coronavirus pandemic (to be assessed by the courts). It will not help those tenants who can afford to pay rent but are exploiting the covid-19 crisis as a reason not to pay. The exact criteria for assessing rent is not yet known.

The government plans are silent as to whether the new legislation will extend to a ban on ordinary debt recovery proceedings. There are already significant delays in this area with courts operating at a reduced capacity.

At the time of writing this article, the Corporate Insolvency and Governance bill has not yet been published and the current law on winding up and statutory demands remains in effect.

Winding up and statutory demands - what is the current law?

If you are a commercial tenant that has failed to pay rent, a landlord is not obliged to serve a statutory demand before commencing a winding up petition, unlike individuals or partnerships where a statutory demand is required.

Once a winding up petition is served on the tenant, it will then be advertised in the London Gazette and following this, a hearing set. An advertisement in the London Gazette could have several detrimental effects on a tenant. For example, suppliers may see it and cease trading with them or banks may react by freezing their bank accounts, effectively putting a stop to any trade. It is possible to adjourn a winding up petition (at the courts discretion) where the tenant has sought time to pay arrears.

A threat of winding up proceedings is therefore very serious for a tenant but also the landlord.  A tenant should be aware it does not always benefit a landlord to start insolvency proceedings as a tactic to get the tenant to pay rent.  The landlord cannot withdraw a petition started, even if the tenant subsequently pays the rent. This means if the tenant is wound up, the rent received will need to be repaid and the landlord will then have to recover the arrears through liquidation, which could lead to little return.

We await the draft Corporate Insolvency and Governance bill to see precisely how the government will tackle the current issues faced by commercial tenants in this area.

Please contact Jeremy Lederman, Rob Souber or Bhavini Kalaria if you would like further advice or guidance on any of the issues raised in this article.