The use of statutory demands and winding up petitions on commercial tenants has been severely restricted by insolvency legislation. This note considers the limitations placed on landlords faced with non-paying corporate tenants during the Coronavirus pandemic.
Our earlier blog, Coronavirus (COVID-19) and commercial leases, set out the implications of the Coronavirus Act for commercial leases. The Coronavirus legislation prevents landlords from initiating forfeiture for non-payment of rent until 30 September 2020.
Landlords ability to present winding up petitions
Restricting the options available to landlords led to concerns that more aggressive tactics would be used, including petitioning for the winding up of non-paying tenant companies. The Corporate Insolvency and Governance Act 2020 came into force in late June to combat this. Please see our blogs Corporate Insolvency and Governance Bill and Corporate Insolvency and Governance Act 2020 opens new frontier for insolvency law for a general overview. The Act is far-reaching and this blog focuses only on the impact on commercial leases.
This legislation applies retrospectively to any winding-up petitions presented on or after 27 April 2020. In a recent High Court case an injunction was successfully obtained by a tenant to prevent a landlord from presenting a winding-up petition on the basis that the legislation was soon to be passed and so even in advance of it becoming law it was already having a real effect on a landlord’s ability to apply pressure on tenants.
Landlords can usually rely on an unsatisfied statutory demand as evidence that a company is unable to pay its debts and should be wound up. However, the Act renders any statutory demands issued during the ‘relevant period’ void for this purpose. The relevant period is the period starting 1 March 2020 and ending 30 September 2020. It does not matter when and how the debt arose. What matters is when the statutory demand was served.
Whilst this legislation is in force, a landlord presenting a winding up petition in the relevant period must be able to show:
- Coronavirus has not had a financial effect on the tenant company; or
- The facts relied on would have arisen even if Coronavirus had not had a financial effect on the tenant company.
If a landlord wanted to pursue a tenant for unpaid rent in the past, it would often serve a statutory demand. If that didn’t work, the landlord could then petition for the tenant company to be wound up. Now, landlords have had both an option taken away from them and a burden placed on them should they wish to petition for tenant insolvency. In practice it will be very difficult for landlords to show that Coronavirus has not had a financial effect on a commercial tenant, even those who have continued trading.
It is likely that the relevant period will be extended to protect tenants while they recover from the effects of lockdown. MPs have called for the initial period to be extended to September and we will keep this blog updated.
This legislation only applies to corporate debtors. It does not apply to tenants who are individuals. It remains to be seen whether individuals will be afforded similar protection. Indeed, it remains to be seen whether landlords will be afforded any protection where their tenants have stopped paying rent. These are temporary measures and the obligation to pay rent has not gone away. The aim of the Act is to provide breathing space in the hope that businesses can be saved from insolvency.
If you are affected by any of the issues raised above please contact me.
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