Corporate Insolvency and Governance Act 2020 – a review of the impact on landlord enforcement option
The Coronavirus pandemic has had a devastating effect on the British economy. The UK government has responded to the crisis by passing a series of Acts and regulations designed to ameliorate the worst of the crisis and to assist struggling businesses to stay afloat during these unprecedented times of market disruption. The latest piece of legislation is the Corporate Insolvency and Governance Act 2020 (“CIGA”) which amends certain aspects of the Insolvency Act 1986. The provisions of CIGA are intended to be temporary changes to the law relating to the governance and regulation of companies and other entities. The purpose of this article is to give a high level overview of the changes and how they are likely to impact on commercial landlords seeking to bring enforcement proceedings against defaulting tenant companies.
The “new normal” for landlords
The grim reality of the pandemic is that many of the options usually available to a commercial landlord when faced with a defaulting tenant are at best greatly curtailed or at worst suspended indefinitely. The raft of acts and regulations passed in response to the pandemic all contain extension clauses. It is vital that landlords bear in mind when deciding on their collections strategy that the “cut off” dates set out in these acts may be extended at any time. The Coronavirus Act 2020 is an excellent example of this phenomenon. It imposed a suspension on the forfeiture of most business tenancies on the grounds of non-payment of rent. The suspension was due to expire on 30th June 2020. It was extended to 30th September 2020 and has been extended further to 31st December 2020. A commercial landlord will have to wait until 2021 before it can exercise its rights to forfeit a lease on the basis of a tenant’s non-payment of rent.
CIGA and statutory demands
The formal service of a statutory demand in terms of the Insolvency Act 1986 was a particularly useful tool for a commercial landlord faced with a defaulting corporate tenant. The failure to satisfy a statutory demand meant that the defaulting company had committed an “act of insolvency” which would permit a landlord to approach a court for the winding up of the company. CIGA initially restricted the use of statutory demands and the presenting of winding up petitions to 30th September 2020. That period has now been extended to 31st December 2020. What this means, in effect, is:
· statutory demands served within the period 30th March 2020 to 31st December 2020 are ineffective.
· No winding up petitions will be granted for the period 30th March 2020 to 31st December 2020 unless the petitioner is able to show that:
o they have reasonable grounds to believe that the Coronavirus pandemic has not had a financial impact on the company, or;
o the relevant grounds would have applied even if the Coronavirus pandemic had not had an effect on the Company.
The overall impact of CIGA is that landlords are effectively restricted from using the winding-up process to recover unpaid rent until 31st December 2020 or possibly longer if the date is extended further by the government.
The “gateway moratorium” – a permanent change to the insolvency law landscape
This is a new innovation introduced through CIGA as an alternative to the existing options available to struggling companies which were company voluntary arrangements (“CVAs”) or administration. This new procedure is likely to be of great interest to corporate entities and it is important for commercial landlords to be aware of the possible effect of this new regime.
CIGA has introduced a new moratorium period which may be granted on the filing of the necessary papers at court. Unlike other schemes under the Insolvency Act the directors retain control of the company and are effectively given “breathing space” to attempt to trade their way out of their financial difficulties. The key aspects of this scheme are:
· the operations of the company are overseen by a professional insolvency practitioner known as a “monitor”;
· the moratorium lasts for a period of 20 business days;
· the moratorium period may be extended on application to court;
· during the period of the moratorium the actions of creditors are suspended which includes actions for recovery of debt, forfeiture claims by landlords, winding up petitions and administration applications.
During the currency of the moratorium, the company has a “payment holiday” from most pre-moratorium debts (including rent). However, the obligation to pay rent continues throughout the moratorium.
However, while at first glance of it this may appear to be good news for tenants and bad news for landlords faced with unpaid pre-moratorium unpaid rent, the 20 business days may not be a sufficient length of time for a struggling business to trade its way out of financial distress. The extension application has to be agreed to by all creditors alternatively granted by a court. In order to secure a further extension the company must show that it has paid:
· all pre-moratorium debts (excluding those subject to the payment holiday);
· all debts (including rent) incurred during the moratorium period.
It remains to be seen whether this moratorium procedure will be of real assistance to struggling companies. It may well be that the government will introduce amendments to the provisions to make it easier for companies to obtain extensions beyond the 20 business day period.
It’s not all bad news
While enforcement options may be restricted the good news is that the obligation to pay the rental and other obligations under the lease remain in force. Arrear rentals will continue to accrue interest in accordance with the terms of your lease agreement. This would be an excellent time to sit down with your legal advisor to consider your options in the light of CIGA to chart the best possible course for your business to weather this financial storm system.
his article is provided for general information only and is not intended to be nor should it be relied upon as legal advice in relation to any particular matter. If you require specific legal advice on any issue relating to your landlord/ tenant relationship or Corporate Insolvency and Governance Act 2020, we at Serenity Law LLP will be able to assist. Please contact us on 0800 019 7773 to arrange a consultation