So where are landlords and tenants now following the September quarter day?
In March 2020 the Government began restricting actions that could be taken to recover unpaid rent. A ban on forfeiture for non-payment of rent was introduced in the Coronavirus Act 2020 (CA 2020) and restrictions on the use of winding-up petitions and statutory demands (generally) were subsequently introduced in the Corporate Insolvency and Governance Act 2020 (CIGA).
The measures remained in place for approximately eighteen months and then, with effect from 1 October 2021, the protections afforded to businesses against aggressive debt recovery action (contained in CIGA) started to be phased out. Despite the changes, there remain temporary restrictions in relation to the recovery of commercial rent arrears and they are expected to remain in place until March 2022.
In this article, DLA Piper’s experienced Real Estate and Restructuring lawyers assess the debt collection restrictions contained in both Acts.
This note incorporates references to the Corporate Insolvency and Governance Act 2020 (Coronavirus) (Amendment of Schedule 10) (No. 2) Regulations 2021 (SI 2021/1091) (which effectively inserted new replacement measures into CIGA in relation to winding up petitions); the announcements made by Government on 16 June 2021 in relation to forfeiture, Commercial Rent Arrears Recovery and the proposed new legislation to deal with ringfencing rent arrears that have accrued during the pandemic “when a business has had to remain closed”; and the Government's policy statement titled 'supporting businesses with commercial rent debts' published on 4 August 2021.
Prior to the COVID-19 pandemic, a landlord of commercial premises had several options when faced with non-payment of rent. Many of the options are and continue to be restricted. The following table sets out the current position in summary. Further detail in relation to the restrictions follows.
Non-payment of rent would have exposed a tenant to the risk that a landlord could peaceably re-enter the premises without notice (known in legal terms as forfeiture) and take possession of the premises without court action by changing the locks, effectively ending the lease – although relief from the courts could be sought and would be available to tenants if they paid arrears plus the landlord’s costs.
Suspended from 26 March 2020 to 25 March 2022 (following the most recent extension).
Commercial Rent Arrears Recovery (or CRAR) replaced the common law remedy of distress for rent arrears recovery in 2014. It allows a landlord to instruct an enforcement agent to take control of a tenant's goods and sell them in order to recover an equivalent value to any rent arrears.
CRAR cannot be used unless the tenant has rent arrears of at least:
Prior to the restrictions CRAR could be exercised with 7 days or more of rent outstanding.
This restriction on the use of CRAR has been extended until 25 March 2022. However, the minimum threshold of 554 days’ rent outstanding has not been increased. This means, broadly, that a tenant who failed to pay rent from the March 2020 quarter day to the June 2021 quarter day will be protected (if the net arrears are less than the required 554 days) but if they also failed to pay the September quarter’s rent (and future quarters’ rents) CRAR may be exercised. This is believed to reflect the Government’s aim to ringfence Covid arrears and treat them differently from future rents.
A statutory demand is a written demand for payment of a debt. It has often been used as a quick and relatively inexpensive method for landlords seeking to take action for non-payment of rent.
Statutory demands are often issued to seek to pressure debtors into paying the sums due prior to more formal legal action in the form of a winding-up petition, although a landlord is not required to issue a statutory demand before issuing a winding-up petition.
A winding-up petition is essentially a court application for a debtor to be put into compulsory liquidation on the grounds that it is unable to pay its debts. A landlord that has not been paid could simply present a winding-up petition at court. Commonly, however, a statutory demand that has not been paid within 21 days is used to establish the debtor’s insolvency.
It is open to a landlord to issue debt proceedings in court to recover unpaid rent. Prior to the restrictions on winding-up petitions and statutory demands, this was an option seldom used by landlords, unless there was some dispute in relation to whether the debt was due and owing (which would make the winding-up petition route unavailable), as it is a more lengthy and costly procedure. Commencing debt proceedings for rent might be more attractive where the tenant has assets over which a charging order could be obtained or it has goods that could be controlled using writs and warrants of control.
A creditor has standing to make an application to court for administrators to be appointed in respect of a company. Once appointed and an order is made a moratorium applies against certain actions against the company without the permission of the court. However, this is a more costly and complex method than presenting a winding-up petition and has not been commonly used in practice by landlords.
Many landlords hold a rent deposit on which they can draw when rent is not paid.
Landlords could also seek to recover rent from any third parties who have guaranteed the tenant’s liabilities under the lease.
More on the restrictions
The CA 2020, which became law on 25 March 2020, suspended and continues to suspend a landlord’s ability to take forfeiture action for business tenancies (as defined by the Landlord and Tenant Act 1954) in England and Wales, so that business tenants who cannot pay their rent (which is defined to include all sums payable under a lease) will be protected from forfeiture.
The measures, effective from 26 March 2020, mean that no business tenant can be forced from their premises in the period up to 25 March 2022 if they miss a payment. Equally, during this period, no action by a landlord (other than giving an express waiver in writing) will be regarded as waiving a right of re-entry or forfeiture for non-payment of rent.
It should be stressed that the CA 2020 merely suspends a landlord’s ability to forfeit a lease during the suspension period; it does not prevent rent and other sums due under the lease from accruing. These sums, together with interest, remain the liability of the tenant so the Act merely offers a “breathing space” for tenants. It does not waive the tenant’s liability to pay.
Winding-up petitions and statutory demands
CIGA implemented the measures announced by the UK government on 23 April 2020 to 'safeguard the UK high street against aggressive debt recovery actions' during the COVID-19 pandemic.
The measures that were in place until 30 September 2021 set a high bar for creditors (generally) seeking to issue a winding-up petition against a debtor company. There was a blanket ban on statutory demands being used for presenting petitions and conditional restrictions on petitions that otherwise were based on a company's inability to pay its debts.
A creditor was prohibited from presenting a winding-up petition against a debtor company on the grounds that it was unable to pay its debts, unless that creditor had reasonable grounds for believing that either (i) COVID-19 had not had a 'financial effect' on the company; or (ii) the company would have been unable to pay its debts regardless of the financial effects of COVID-19. The 'financial effect' test was met if (and only if) the company's financial position had worsened in consequence of, or for reasons relating to, COVID-19.
On 30 September 2021, some of the protective measures afforded to businesses against aggressive debt recovery action were phased out and the restrictions contained (at that time) in CIGA on the use of winding-up petitions and statutory demands (generally) were replaced by new measures relating to winding up petitions only.
From 1 October 2021, in order to present a petition, a creditor needs to satisfy four conditions:
Condition A: the debt owed (i) must be for a liquidated amount; (ii) must have fallen due for payment; and (iii) cannot be in respect of rent or any other payment (for example insurance and/or service charges) due under a business tenancy (if the debt is unpaid by the tenant by reason of a financial effect of COVID-19);
Condition B : the creditor must have delivered a written notice to the debtor company, which seeks the company's proposal for payment of the outstanding debt (Warning Notice);
Condition C: a period of twenty-one days must have expired beginning with the delivery of the Warning Notice and without the company making a satisfactory proposal to the creditor for the payment of the debt; and
Condition D: the debt (or sum of the debts, where there is more than one) owed to the petitioning creditor must be at least GBP10,000 and where the petition is presented by more than one creditor, they must each meet Conditions A to C, with the sum of the debts owed to the creditors being GBP10,000 or more.
No 'financial effect' test is applicable in relation to a winding up petition except where it relates to rent and any other payments due under a business tenancy.
The new restrictions will be in place until 31 March 2022 (unless extended).
There is no longer any blanket ban on the use of statutory demands and the restrictions do not impact the statutory demand process. Accordingly, statutory demands can (from 1 October 2021) be used for the purposes of presenting a winding-up petition, however, the actual petition will need to satisfy the (above) four conditions.
The carve out at Condition A for rent and any other payments due under a business tenancy, means that petitions cannot currently be presented in respect of a commercial rent debt until 1 April 2022 unless the creditor can prove that non-payment of the debt is not related to the pandemic.
The new moratorium
The CIGA also introduced a new standalone moratorium intended to give struggling businesses a formal breathing space to pursue a rescue plan. The moratorium is not linked to a particular insolvency procedure but could be used in combination with another process, for example with a CVA.
Moratoria restricting creditor action are already available in insolvency law, including the moratorium which arises in administration. The restrictions on creditors in the new moratorium process are similar to those that arise in administration and include restrictions on insolvency proceedings, enforcement of security, and forfeiture. A tenant’s moratorium would therefore limit a landlord’s options for recovering arrears of rent from the tenant.
The moratorium will come into effect at the time the directors file prescribed documents at court or at the time the court makes an order for the company to be subject to a moratorium. The moratorium lasts for an initial period of 20 business days beginning with the business day after the day on which the moratorium comes into force, unless it is extended or terminated early. Directors can extend it for a further 20 business days without creditor consent, and many moratoria are therefore expected to last for 40 business days. Further extensions are available with creditor consent or a court order.
The directors must state when applying that the company is or is likely to become unable to pay its debts. An insolvency practitioner who will act as the ‘monitor’ and supervise the moratorium must also provide a statement that, in the monitor’s view, it is likely that the moratorium would result in the rescue of the company as a going concern.
During the moratorium various restrictions are placed on the company’s activities, including significant restrictions on the payment of most pre-moratorium debts. The company is however required to continue to pay certain debts during the moratorium which include amounts payable in relation to rent in respect of a period during the moratorium. We consider the moratorium in more detail in this article.
Take up of the new moratorium procedure has, thus far, been low.
Regulations have provided commercial tenants with more breathing space to pay rent by preventing landlords using CRAR unless rent arrears have accrued from before the March 2020 quarter date. Rent arrears must amount to at least:
- 189 days’ rent on or after 24 June 2020 (but before 29 September 2020);
- 276 days’ rent on or after 29 September 2020 (but before 25 December 2020);
- 366 days’ rent on or after 25 December 2020 (but before 25 March 2021);
- 457 days’ rent on or after 25 March 2021 (but before 24 June 2021); or
- 554 days’ rent on or after 24 June 2021.
Initially, under this restriction, the required level of rent arrears was increased from 7 to 90 days' rent for the period prior to 24 June 2020 but this measure received criticism for not adequately protecting tenants (given it did not cover a full quarter). The latest announcement on the extension to the restriction means CRAR cannot be exercised against tenants before 25 March 2022 unless (i) between 24 June and 28 September 2020 they have more than two quarters of rent outstanding (ii) between 29 September and 24 December 2020 they have more than three quarters of rent outstanding, (iii) between 25 December 2020 and 24 March 2021 they have more than four quarters of rent outstanding, (iv) between 25 March and 23 June 2021 they have more than five quarters of rent outstanding or (v) after 24 June 2021 they have more than six quarters of rent outstanding.
The latest announcement does not increase the minimum threshold of unpaid rents any further than 554 days, even if the restrictions on the use of CRAR have been extended to March 2022. This means that a tenant who failed to pay rent from the March 2020 quarter day to the June 2021 quarter day will be protected from CRAR (if the net arrears are less than the required 554 days) but if they also failed to pay the September quarter’s rent (and future quarters’ rents) CRAR may be exercised. This is believed to reflect the Government’s aim to ringfence Covid rent arrears and introduce new laws to deal with them (see below) and encourage the payment of future rents.
New laws to tackle accrued rent arrears of businesses forced to shut during lockdowns
The Government has announced proposals for a new law to tackle accrued rent arrears for businesses who were forced to close during the pandemic.
The proposed legislation will be enacted to:
- ringfence rent debt accrued during the pandemic by businesses affected by enforced closures; and
- set out a process of binding arbitration to be undertaken between landlords and tenants.
The aim appears to be to encourage tenants to prioritise the payment of future rents and to introduce protections for tenants in respect of older “ringfenced” Covid arrears. Landlords will be expected to make allowances for the ringfenced arrears and share the financial impact with tenants, for example, through a partial waiver of rent arrears or long-term payment plans. If landlords and tenants cannot reach an agreement, a binding arbitration process will be imposed. The binding arbitration is to be used as a last resort, after bilateral negotiations have been undertaken and only where landlords and tenants cannot otherwise come to a resolution.
Once the above legislation is passed, it is expected that the current commercial tenant protection measures (i.e. the forfeiture / CRAR moratorium) will only apply to the ringfenced arrears. It is not clear whether the winding-up restrictions will be modified in any way once the new legislation is enacted.
The ringfenced arrears that will be the subject of the legislation are expected to comprise rent debt accrued from March 2020 by commercial tenants affected by COVID-19 business closures (or other Non-Pharmaceutical Interventions (NPIs)) until restrictions for the tenant’s sector were / are removed. Once the new legislation has been enacted, it is expected that landlords should be able to evict tenants for the non-payment of commercial rent:
- that relates to a period prior to March 2020;
- that relates to a period after the end of restrictions for the tenant’s sector; and
- if the tenant has not been affected by business closure / other NPIs during the relevant rent period.
No timetable has yet been provided for the new legislation, save that the Government has confirmed that it will be introduced in the currently Parliamentary session, so before Spring 2022.
Prior to the binding arbitration system being put in place, the Government anticipates publishing a revised Code of Practice setting out the principles it expect parties and arbitrators to adhere to. The revised Code will be a ‘strengthened’ version of the voluntary Code of Practice published in June 2020 (see further commentary below).
Tenants and landlords will be expected to contribute to the cost of arbitration if both are found to have negotiated in good faith. However, if any party is found not to have negotiated in the spirit of the legislative principles, arbitrators may be empowered to grant the cost of arbitration as part of their decision.
It is unclear how the new legislation will interact with restructuring processes, such as CVAs and Part 26A restructuring plans, which can be used to compromise rent claims without the consent of all landlords via the “cram down” mechanisms available through those processes.
There is also scant detail on whether ringfenced arrears will be calculated by reference to a period of business closure or whether other ‘restrictions on trade’ will also count. Certain sectors have been moved in and out of trading restrictions during the pandemic. For sectors like ‘offices’, it is unclear whether Government guidance to ‘work from home’ will count. Further, there is uncertainty as to how restaurants will be dealt with given that some were able to trade by offering take-away services.
Finally, the lock down restrictions have not been implemented / eased on the usual rent quarter days / month end dates. It is assumed that the ringfenced arrears will be calculated by apportioning rent relating to part only of a quarter / month. A system where a quarter’s rent becomes due just before lockdown and the whole rent is not eligible to be counted as ringfenced rent, would be unsatisfactory for tenants.
It is still open to a landlord to draw down on any rent deposit it holds. However, careful thought should be given to the timing of such drawdown. In particular, if the tenant is in administration and there is a possibility that rent falling due will be paid as if an expense of the administration (and therefore ahead of sums due to floating charge holders and the administrators’ own remuneration), a landlord would be better advised to retain the rent deposit for other sums falling due which will not qualify to be paid as if an expense (such as dilapidations).This option however is one of the few options left open to a landlord.
Pre-pandemic, the threat of proceedings was seldom used by landlords to chase payment of rent arrears unless there was a dispute in relation to whether the rent debt was due and owing. Given the time and cost implications of court proceedings, this route is far from ideal, however, given it is one of the few options left open to a landlord we are seeing more landlords choose to threaten and commence proceedings particularly in circumstances where the tenant has assets over which a charging order could be obtained or it has goods that could be controlled using writs and warrants of control.
One other unrestricted route that is still available to a landlord (as an unsecured creditor) wanting to commence an insolvency process against a tenant for unpaid rent as a result of COVID-19, is to apply to court for the appointment of an administrator. However, it is very unlikely that a landlord would proceed down this route, simply from a cost standpoint. The statutory demand / threat of a winding-up petition was a relatively cheap and effective debt collection tactic. The threat of an application to court to appoint administrators could not be used in the same way.
Action against guarantors
Neither of the Acts restrict action being taken against guarantors under guarantees that may have been given in support of rent obligations and lease liabilities.
Corporate guarantors will have the benefit of the same protections in relation to winding-up petitions, such that any petitioning creditor will need to satisfy the prescribed conditions (set out above) in order to present a petition against a guarantor. Some guarantees may include a stipulation that the tenant has been pursued first, which may make action against guarantors more difficult.
Q&A on the restrictions (post-1 October 2021) in CIGA for landlords and tenants
How are Landlords and Tenants impacted by the restrictions?
The carve out at Condition A for rent and any other payments due under a business tenancy means that petitions cannot be presented in respect of a commercial rent debt until 1 April 2022 unless the creditor can prove that non-payment of the debt is not related to the pandemic.
Arguably the restrictions leave commercial landlords in a worse position than they were in previously (under the restrictions that applied up to and including 30 September 2021). From 1 October 2021, other creditors are free to use winding-up petitions as a means of enforcement (without having to evidence that COVID-19 has not had a 'financial effect').
The risk for commercial landlords is that debtor companies prioritise repaying non-rent debt, to avoid winding-up petitions being presented against them. This could have the effect of pushing commercial landlords to the back of the queue, with a debtor company's finances depleted by the time the landlord is allowed to enforce or otherwise proceed to arbitration (under the Government's planned statutory rent arbitration scheme, intended to be implemented before Spring 2022).
What is the Warning Notice process?
The serving of a Warning Notice introduces a requirement for creditors to demonstrate that they have sought to negotiate repayment of a debt, before seeking to wind a company up. The Government's aim appears to encourage and foster engagement between debtors and creditors which the current statutory demand process does not explicitly invite.
The restrictions prescribe the content of a Warning Notice and the method for delivery of the same. They also require that, as part of a creditor's winding-up petition application, it must include a statement confirming (i) that it has sent a Warning Notice to the debtor; but also (ii) whether it has received any proposals from the debtor company, and, if it has, a summary of the reasons why such proposals are not satisfactory.
It remains to be seen whether the court will assess the veracity or look behind the creditor's reasons for rejecting any proposals put forward by a debtor or whether a creditor's given reasons will be taken at face value. In the absence of any judicial guidance, it will be at the sole and absolute discretion of the relevant creditor as to whether a debtor's payment proposal is satisfactory.
Pending any such guidance, creditors should be wary of rejecting fair, reasonable and workable proposals for punitive and/or irrational reasons. Where any proposal is rejected, we suggest that creditors fully record and minute their rationale for the same, so that they have contemporaneous evidence to support the summary reasons for rejection given in any subsequent application for a winding-up petition.
Are tenants protected from statutory demands for unpaid rent?
No. Statutory demands can be used for the purposes of presenting a winding-up petition, however the actual petition will need to satisfy the four conditions. From a commercial landlord standpoint, and given the carve out at Condition A, we expect that service of a statutory demand will be of limited benefit in circumstances where a winding up petition cannot be presented (because the debt is unpaid by the tenant due to a financial effect of COVID-19).
The Government has not increased the amount required to serve a statutory demand which remains at GBP750. The threshold of GBP10,000 applies to the actual winding-up petition rather than the statutory demand – it is the first time that a base limit has been introduced for presenting a winding-up petition.
It is not a compulsory requirement for a creditor to serve a statutory demand on a debtor company before presenting a winding-up petition. However, a statutory demand is useful because, if it remains unpaid for more than three weeks, this can be used to support a winding-up petition on the grounds that the debtor company is unable to pay its debts.
Given that the time periods for a statutory demand and a Warning Notice are the same (3 weeks / 21 days) we anticipate that a creditor who is owed GBP10,000 or more will serve a statutory demand on the debtor at the same time as the Warning Notice.
Receipt of a statutory demand might trigger a default in a tenant debtor's facility documentation or commercial contracts, but it is likely that where a statutory demand would trigger a cross default, an ordinary demand would also do the same.
There is nothing in the Act to stop default interest contractually due under a lease applying and accruing. A standard demand may be sent to trigger the application of default interest.
Do the restrictions stop a winding-up petition being served for unpaid rent?
No. There isn’t a blanket ban on presenting winding-up petitions in relation to unpaid rent. But, while the temporary provisions are effective, landlord creditors are well advised not to present a petition unless they are satisfied that either (i) COVID-19 hasn’t had a financial effect on the debtor company; or (ii) that the company was unable to pay its debts regardless of COVID-19.
How are rent arrears being dealt with?
The continuing restrictions, whilst very welcome for tenants, do not deal with the substantive problem of rent debt being built up and long-term balance sheet issues for tenants.
The proposed new ringfencing and arbitration legislation may assist with this – it looks set to ringfence the arrears accrued during the pandemic and require landlords and tenants to agree on how those arrears will be dealt with, or face binding arbitration.
We expect that tenants will otherwise look to use CVAs or the Part 26A restructuring plan process (also introduced in CIGA, see our commentary on that process) (or possibly, a pre-pack administration) in order to deal with the build-up of COVID-19 debts and any consequential balance sheet issues.
Is there anything that landlords can do?
The winding up restrictions (in combination with the forfeiture moratorium for unpaid rent) continue to limit significantly the options for recovery of unpaid rent (if the debt is unpaid by the tenant debtor due to a financial effect of COVID-19).
However, there is nothing to stop landlords being able to deploy other remedies, for example court debt claims, utilising (essentially drawing down on) rent deposits (provided that the provisions of the deed are strictly adhered to), demanding and pursuing payment from current tenant guarantors or threatening to make a court application for an administration order. However, such other remedies (to the extent they are available) will in many instances be more costly and/or less effective than the threat of forfeiture or winding up action against the tenant.
In order to pursue valid claims against others beyond the current tenant, such as original tenants, previous tenants or guarantors under an authorised guarantee agreement there is a strict need for landlords to serve a section 17 notice under the Landlord and Tenant (Covenants) Act 1995 (when it comes to new leases entered in to after 1 January 1996) within 6 months of the debt under the lease falling due, in order to preserve their rights to pursue original tenants, previous assignees and guarantors etc. for that debt. If a landlord fails to do this within 6 months of a fixed charge under a lease falling due (to include rent and other fixed sums) then the landlord loses its ability to pursue those who have a retained liability to satisfy that debt in the event of a current tenant default.
Where a tenant has sub-let its premises and the tenant is in arrears of rent under its lease, the CRAR procedure gives a superior landlord a right to serve a notice under section 81 of the Tribunal, Courts and Enforcement Act 2007 upon its subtenant or indeed anyone with an interest below requiring them to pay rent directly to the superior landlord rather than to its own immediate landlord to the extent of the arrears due from their immediate tenant. If the subtenant fails to pay, the superior landlord can take action against it, so far as they are not restricted by the restrictions already mentioned. So whilst CRAR is not going to be available a sub tenant is another party to seek recovery from as there is nothing to prevent a section 81 notice being served, it just has limited teeth in the current climate.
Importantly, a landlord can only serve a valid section 81 notice on the subtenant where it is entitled to exercise CRAR against its immediate tenant. Credit will be given for any rent already paid by that sub tenant.
Code of Practice
In June 2020, the government published the “Code of Practice for commercial property relationships during the COVID-19 pandemic”, developed with industry leaders to assist commercial landlords and tenants in mapping out their plans for economic recovery. The code is voluntary and does not alter the underlying relationship between landlord and tenant which is governed by the lease and supplementary documents. The Code recognises that the economic impacts of the COVID-19 pandemic have been felt across many sectors and applies across all types of commercial leases held by businesses which have been seriously negatively impacted by the COVID-19 pandemic. Therefore, if a tenant has not been adversely impacted, they will not be covered by the Code and will be expected to pay rent in full, putting pressure on those tenants who can pay to do so and others to pay what they can.
The focus of the Code is on best practice, encouraging landlords and tenants to be transparent in their discussions, and to act reasonably and responsibly. When negotiating rental agreements, landlords and tenants are encouraged to take account of the principles of the Code.
We are not seeing that the Code is having significant effect in practice; the fact that it is (currently) voluntary and lacks sanction for non-compliance, limits its effectiveness. The principles it sets out however are all seemingly on their face very sensible however, there has been limited 'buy in' from the property industry in our experience.
Our teams are available to advise and assist on available options and work with landlords and tenants to refine their strategies and approach. Please contact your usual DLA Piper contact if assistance is needed. Our advice remains that landlords and tenants should work collaboratively together to achieve the best mutual outcome in these unprecedented times.
This article focusses on the position in England, there are some differences for Scotland which are not covered here. Our colleagues in Scotland would be pleased to discuss the Scottish position, please contact the authors or you usual DLA Piper contact to be put in touch with one of our team in Scotland.