Stop Press: The Commercial Rent (Coronavirus) Act 2022 (“CRCA”) received Royal Assent on 24 March 2022, enabling commercial tenants to be granted relief from payment of certain debts under a new arbitration process if the landlord and tenant are unable to agree between themselves. Aside from those introduced by CRCA, the remaining debt recovery restrictions available to landlords and other creditors came to an end on 31 March 2022.
Since March 2020, the UK Government has implemented a variety of provisions, restrictions and allowances which have been intended to contend with the high number of COVID-19 cases and the pandemic’s economic fallout.
On 1 October 2021, some of these temporary insolvency restrictions were phased out: statutory demands against companies and winding up petitions returned – subject to certain caveats including an increase in the threshold winding up petition debt to £10,000 and a requirement for creditors to seek proposals from the debtor allowing 21 days for a response before they can petition.
The Government’s stance at the time was that “the existing restrictions will remain on commercial landlords from presenting winding up petitions against limited companies to repay commercial rent arrears built up during the pandemic… and commercial tenants will continue to be protected from eviction until 31 March 2022”.
However, despite the lifting of the majority of insolvency restrictions on 31 March 2022, such that any other creditor has now been restored to all the powers they had before the pandemic, the introduction of CRCA represents a continuance and remnant of the Government’s erstwhile strategy of kicking the proverbial can down the road, at least so far as landlords are concerned: if this was their idea of an April Fool’s joke, we know many landlords who fail to see the funny side. This attitude seems to raise commercial tenants to most favoured, protected status (and of course there were good reasons for protecting such tenants when their businesses were worst affected), as opposed to providing support to landlords to enable them to weather the storm until they have been able to recover vast sums of unpaid rent.
It is concerning for many, in light of reports that the UK economy is already paying a heavy price for ‘long Covid’, and is now of course affected by a new macro-economic crisis in terms of the cost of living and inflation sparked at least in part by the conflict in Ukraine, that this sort of policy simply exacerbates the challenge all creditor businesses now face, namely the ticking time bomb of deferred commercial debt. By declaring open season for all other creditors (including of course those to whom landlords owe money), whilst at the same time tying one of a landlord’s hands behind their back in terms of realising a key asset, the Government has, on one view, conferred most disfavoured, ‘squeezed-middle’ status on landlords. For landlords in this position, it is therefore important to understand precisely to what extent the continuing restrictions do still bind them, and what else they might do to begin to alleviate the pressure by recovering at least some part of the monies owed to them by their tenants.
Under CRCA, landlords are now only restricted from enforcing specific debts related to the pandemic in circumstances where the relevant tenancy has in fact been adversely affected by the pandemic (i.e. either the tenant’s business or premises were subject to a lockdown between 21 March 2020 and 18 July 2021). These specific debts are rent, service charges or interest incurred from 21 March 2020 and ending with the last day that the tenant’s business or premises were in fact subject to a lockdown (if no earlier date then by default 18 July 2021) (“Protected Rent Debts”).
CRCA introduced a moratorium period from 24 March to 23 September 2022 inclusive, unless extended by the Government (the “Moratorium Period”). During this Moratorium Period, a landlord is still restricted (as against commercial tenants) from:
Under CRCA, commercial tenants or landlords are able to refer a matter to a new arbitration process by 24 September 2022 (unless extended by the Government), through which the parties are able to make formal proposals for the relief from payment of a Protected Rent Debt. The arbitrator’s broad guiding principles in this process are that any award should be aimed at preserving or restoring the viability of the business of the tenant, so far as that is consistent with preserving the landlord’s solvency, whilst balancing that the tenant should be required to meet its obligations as to the payment of Protected Rent Debts in full and without delay. Any awards will be made public, subject to any restrictions on confidential information. We were of course, at the time of writing, yet to see the arbitration process in action, and we did not even know who would be seeking referrals as arbitrators or what might qualify them for making a meaningful assessment of how viable the tenant’s business is, or at what point the landlord’s own solvency might be jeopardised. We rather suspect that few landlords will be desperately keen to refer matters themselves without some sense of what the likely outcome would be.
It is, we suggest, easy to understand why many landlords are left feeling this gives them no adequate security or remedies in respect of large amounts of historic, accrued debt owed to them, whilst their commercial tenants quite possibly continue to edge closer toward formal insolvency (even if they are not already at that point) – which of course will adversely affect a landlord’s financial position and, in the more extreme cases for those with multiple commercial tenancies, could have the potential to threaten a landlord’s solvency. However, hope is not lost, as there may be other options through which a landlord might restore a modicum of control and relative certainty, even if their commercial tenant appears to be insolvent.
If a commercial tenant has proposed, is imminently entering into, or has entered into a formal insolvency procedure, a landlord is generally, subject to lease terms, able to forfeit the lease.
A CVA is a mechanism by which a company is able to continue trading and settle its unsecured debts under an agreement with its creditors to pay only a proportion of the amount it owes. A CVA is proposed to the company’s creditors for approval and is implemented if at least 75% (by value) of creditors vote in its favour. It binds all creditors who are entitled to vote – including dissenting parties and unknown creditors whose debts are encompassed by the proposed CVA. Dependent on its terms, a CVA can cover a company’s future debts (for instance, future rent).
Until the tenant enters into a CVA (i.e. until it is formally approved by creditors), a landlord is able to pursue any other relevant remedies, subject to the temporary restrictions set out above. However, once the CVA is entered into, then the landlord is bound by the terms of the CVA, provided they were entitled to vote – regardless of whether they actually voted or if they were notified of the qualifying decision procedure at all.
A CVA proposal can be a rather daunting document (we in the Corporate Restructuring & Insolvency (‘CR&I’) team have reviewed CVA proposals which – with standard conditions annexed – run to some hundreds of pages in length), and it is, we suggest, very much in the interests of landlords to review the proposals in the round and with an open mind and to think commercially about the anticipated outcomes of other insolvency procedures, such as a CVL/ CWU (addressed below), which would be inevitable if the CVA were not approved.
Occasionally, of course, CVA proposals may not appear to provide a more commercially attractive outcome for a landlord at all, in comparison to an alternative procedure. Landlords can sometimes also see their potentially substantial claim for future rent and dilapidations reduced to the notional sum of £1 as a result of difficulties in quantifying such, meaning that their voting powers are similarly diminished.
Whilst it may be possible to challenge a CVA within 28 days following its approval on the grounds that one or more creditors would be unfairly prejudiced by it, that there were material irregularities, or on some technical, jurisdictional basis (such that the proposal, or aspects of it, does not constitute as an arrangement under the Insolvency Act 1986), these routes of challenge are often slow, expensive and difficult to run.
By way of example, we might consider these, relatively recent attempts by landlords to challenge a retail CVA proposal which were, disappointingly for the landlords, dismissed:
We strongly suggest that landlords seek early advice from specialist solicitors if they are concerned about the anticipated CVA outcomes – our CR&I team would be happy to review CVA proposals and advise as to their options for maximising their proof of debt and voting rights, and if a CVA looks likely nevertheless to be approved, the prospects of a successful challenge.
An administration is a rescue procedure which effectively provides a company time for reorganisation and/or realisation of assets (including external contracts) under a statutory moratorium, during which creditors cannot enforce claims against the company.
The key objectives of an administration are (in the following order):
Provided that the tenant company in administration continues to use the premises for the purposes of the administration (e.g. trading from it), it will be liable to pay the rent and any other sums due under the lease as an expense of the administration. This will be chargeable at a daily rate for the period the administrators use the property, meaning that these are paid in priority over the administrators’ costs and any distribution of funds to creditors. When the administrators cease to use the property, they may look to surrender the lease, meaning that the landlord will be able to install new tenants in place of the tenant company in administration – which in theory may be a better outcome to secure future rental income. If the administration is not going to lead to a rescue, the administrators may pass the company into liquidation and disclaim the lease, which effectively brings it to an end, albeit the landlord can still then prove for unpaid rents in the liquidation and hope for a dividend.
In respect of the rent arrears and other sums which fell due prior to the appointment of administrators, a landlord will need to claim in the administration and, subject to asset realisations, will be paid by way of a dividend distribution which is generally a percentage of the total debt.
A CVL is an insolvent winding up procedure which involves the members of a company passing a resolution to liquidate the company, and the company’s creditors voting to approve the appointment of one or more liquidators (who, like administrators and CVA Supervisors, must be a licenced insolvency practitioner accountant). The liquidator, once appointed, acts as an agent of the company, and owes specific duties to the creditors.
During the CVL, existing proceedings may be (although this does not happen automatically) stayed by the court, meaning that it is often not advisable for a landlord to pursue an application to recover rent. However, in some circumstances, the current rent may be payable as an expense of the liquidation and, similarly to that of an administration, rank above the expenses of the liquidator and other creditors. This is available, for example, if the rental premises is required to retain stock until the point it is sold. A landlord should take this into consideration particularly when contemplating whether to forfeit the lease. Once the liquidator is finished with the premises, they have the power to disclaim the lease, allowing the landlord to find a replacement commercial tenant and secure future rental income.
Generally speaking, and subject to a landlord’s ability to use CRAR in light of the current restrictions, a landlord shall not be permitted to retain any assets seized through CRAR unless the seized goods have already been sold prior to the start of the winding up.
Unlike CVLs, CWUs are commenced by someone (usually, but not necessarily a creditor) presenting a winding up petition to the court, on the back of which a winding up order is made and a liquidator (typically the Official Receiver, at least in the first instance) is appointed.
If a compulsory winding up is pending, CRAR is void and other proceedings are automatically stayed by the court. Once a winding up order has been made, landlords will generally need to obtain leave from the court to pursue enforcement action in respect of unpaid rent, although there will usually be little point in doing so as a claim can usually be agreed with the liquidator. As above, in any type of winding up, the landlord will generally not be permitted to retain any assets seized through CRAR unless the seized goods have already been sold prior to the start of the winding up. In any event, the liquidator may disclaim liability under the lease, allowing the landlord to find new replacement tenants.
A scheme of arrangement and a restructuring plan are compromises between a company and its creditors (or any class of creditors) approved by the court and which allows a restructure or reorganisation of its debts. Each class of creditor has the right to vote to approve the restructuring plan (which is approved by 75% in value of creditors voting) or scheme of arrangement (for which 75% of each class of creditor must also vote in favour).
The difference between a scheme of arrangement and a restructuring plan is that whilst each class of creditor must approve a scheme, a restructuring plan can be approved even if one or more classes of creditors vote against the plan (a “cross-class cram down”), provided that the creditors are no worse off than they would have been under a likely alternative insolvency procedure.
Landlords will likely form a separate ‘class’ of creditor: this in theory means that landlords may have a veto option on a scheme of arrangement. However, if the tenant proposes a restructuring plan, a landlord may find themself having been “crammed-down” by the other classes of creditors regardless of whether they voted for or against the plan.
Whilst schemes of arrangement and restructuring plans are available to debtors, in our experience these are less widely used. However, we strongly suggest that landlords seek early advice from specialist solicitors if they are in receipt of a scheme of arrangement or restructuring plan proposal – our CR&I team are able to review proposals and advise as to their options, voting rights, and likely outcomes accordingly.
Notwithstanding the above, the landlord may have other options to recover the property and outstanding rent, including:
For further information in this regard, please see our recent blog, Coronavirus and Commercial Leases.
Of course, the majority of these remedies do not resolve the matter of long-outstanding rent due to landlords. In any event, we strongly suggest you seek advice from specialised property solicitors prior to taking any of the above steps.
In light of the above, despite the Government’s current ‘pro-debtor-tenant’ attitude, a landlord’s rights are not completely limited in the event of a commercial tenant’s insolvency. Early engagement with the commercial tenant and/or any appointed or advising insolvency practitioner accountants will often make the process less painful and/or fraught with uncertainty, and having a specialist insolvency solicitor and/or ‘friendly’ insolvency practitioner (depending on whether the issues are mainly legal or procedural) advising you as landlord can take much of the sting out of the experience.
Should you or any of your contacts require any guidance with any of the issues highlighted in this blog, please get in touch with any member of our CR&I or Property Litigation teams who would be delighted to assist you.