Corporate Insolvency and Governance Act 2020 and the Impact on Commercial Landlords and Tenants.
The Government has previously announced a number of measures to protect the interests of both landlords and tenants and welcomed transparency within the real estate ‘relationship’. The introduction of the Corporate Insolvency and Governance Act 2020 (the Act), is no exception to the Government’s approach in providing such preventative measures as a result of the pandemic.
The Government has previously announced a number of measures to protect the interests of both landlords and tenants and welcomed transparency within the real estate ‘relationship’. The introduction of the Corporate Insolvency and Governance Act 2020 (the Act), is no exception to the Government’s approach in providing such preventative measures as a result of the pandemic.
The Act is wide in scope and produces several reforms to the insolvency and restructuring regime in England and Wales. Although the Act has only recently come into force (26 June 2020), some of the business protective measures under the Act will apply retrospectively from 1 March 2020.
For the real estate sector, the Act, (along with other things) introduces:
1. A new moratorium providing breathing space from creditors while they seek rescue.
This limits a landlord’s ability to pursue action against a tenant for unpaid rent and will provide a tenant with ‘breathing space’.
This freestanding moratorium will enable all companies that are eligible and in financial distress to be rescued or restructured.
To be eligible under the Act, a company must fall within the criteria referred to in Schedule ZA1 of the Act, not be subject to an outstanding winding-up petition and not be an overseas company.
The directors of the company may obtain a mortarium for the company by filing the necessary documents with the court. One of the documents that must be filed includes a statement from the proposed monitor.
Although the directors will remain in control of the company, they will be supervised by a monitor. The monitor must be a qualified person such as a licenced insolvency practitioner and must consent to act as a monitor for the company in relation to the moratorium. Once the moratorium has come into force, the monitor must act quickly to comply with its obligations under the Act or, if fails to do so without reasonable excuse, commits an offence.
Certain restrictions during the moratorium will apply to a company’s creditors such as, creditors being unable to request payments this will include, a landlord or other person to whom rent is payable.
Moreover, a creditor will not be able to take enforcement action, no floating charge holder may crystallise their assets, nor can insolvency proceedings or any other legal proceedings be commenced against the company, unless by the directors themselves.
The new moratorium initially lasts for 20 business days. However, it can be extended with consent from the directors with or without creditor consent or by the court.
If at the end of the moratorium, a company is still ‘unable to pay its debts’, the company may face liquidation and creditors, such as landlords, will be paid what is owed or a proportion of it in order of priority.
A landlord may benefit from additional security and depending on what it is, this may increase their ability to effectively recover monies owed to it in the liquidation process. For example, where there is a rent deposit, a landlord may hold a fixed charge over the rent deposit money and therefore this would rank higher in the order of priorities.
2. Creditors will face a temporary prohibition from filing statutory demands and winding-up petitions for COVID-19 related debts.
Similarly, a landlord (as a creditor) will be prevented from taking action against a tenant by way of filing a statutory demand or winding-up petition as a method of receiving payment.
The onus will be on the landlord to show that there are reasonable grounds for believing that Covid-19 has not had a financial effect on the tenant.
As such, any winding up procedure made in the last couple of months, that does not meet the necessary criteria, will be void and the tenant company can be restored.
Other options available for landlords to recover rent arrears such as Commercial Rent Arrears Recovery and forfeiture under the Coronavirus Act 2020 have been stayed and will continue to do so until 20 September 2020 see our earlier blogs here.
What now for landlords and tenants?
As a landlord, the Act makes the recovery of unpaid rent more difficult and the Government is diverting landlords away from aggressive rent collection strategies. The requirement for transparency within a landlord and tenant relationship has been recommended and landlords should continue to come to some form of arrangement in relation to payments with their tenant.
As those tenants who can keep up with payments are encouraged to do so, as well as, taking advantage of the Governments emergency funding schemes.
It is advisable that any re-negotiations and alternative agreements between a landlord and tenant that have been brought about by COVID-19 are accurately recorded, documented and kept safe in case such legal dispute arises in the future.
We also recommend paying close attention to any new government guidance at www.gov.uk and following our COVID-19 blog series.
Here to Help
If you have any more questions regarding how COVID-19 might impact your property or if you would like further information on how we can help, you can contact our Commercial Property Team on 0161 941 4000 or email The Commercial Property Team.