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UK COVID-19: Further commercial tenant protections announced by the government

Yesterday, the government announced further protection for the “UK high street from aggressive rent collection”.  This protection takes the form of further restrictions on a landlord’s ability to pursue certain enforcement action against a tenant: in particular, serving statutory demands and presenting winding up petitions for non-payment of rent.

These protections build upon the temporary suspension of a landlord’s right to forfeit for non-payment of rent, which you can read more about here.

As we saw when the government initially announced the suspension of a landlord’s right to forfeit for non-payment of rent, the government’s new proposals on statutory demands and winding up petitions are vague and unclear.  This blog highlights some of the gaps, which we look forward to seeing fleshed out in the proposed legislation.

What is the purpose of the measures?

The government wants to protect the “UK high street” against aggressive debt recovery actions.  It perceives that the majority of landlords and tenants are working collaboratively to reach agreements on debt obligations, but that some landlords have been putting tenants under “undue pressure”.

The government goes on to say that aggressive debt recovery tactics are “unfair”; and that the temporary emergency measures are designed to acknowledge the pressures landlords are facing while encouraging cooperation in the spirit of fair commercial practice.

Who will be protected?

The announcement refers to “high street shops and other companies under strain”, and the commentary in the announcement makes it clear that it extends to both retail and hospitality businesses.   It does also refer to “commercial tenants” without reference to the high street at all; however we infer that whereas the suspension of a landlord’s right to forfeit applies to all commercial tenants, the specific references to the high street suggests that the government’s latest proposals may not apply so widely.

Will the proposals apply if the tenant is still able to pay the rent?

The government is clearly trying to draw a distinction between tenants that can pay their rent but are choosing not to; and those that cannot pay their rent due to COVID-19.  As the proposals are high level it is not clear how this will work, but this distinction is going to be crucial for landlords.

The intended legislation will introduce a temporary ban on the use of statutory demands and winding up orders where “a company cannot pay their [sic] bills due to coronavirus, to ensure they do not fall into deeper financial strain”.

What does not appear to be intended to make its way to the statute books, though, is the requirement for those tenants that can pay to do so.  Instead, the government “calls on tenants to pay rent where they can afford it or what they can in recognition of the strains felt by commercial landlords too” which will fall some way short of many landlords’ hopes in this regard, particularly given the number of retailers who are withholding rent while still trading and appearing to be under no financial strain.

However this hopefully indicates that, unlike the suspension of a landlord’s right to forfeit, the government’s approach on ‘banning’ statutory demands and winding up petitions will be more carefully targeted.

So what protection is being introduced?

As mentioned above, a temporary ban on the use of statutory demands and winding up orders.

To implement this, the government has stated that “any winding-up petition that claims that the company is unable to pay its debts must first be reviewed by the court to determine why.  The law will not permit petitions to be presented, or winding-up orders made, where the company’s inability to pay is the result of COVID-19.”

This indicates that the government may be proposing an additional ‘check’ on landlords taking steps to wind up a company, rather than an outright ban.  It may also suggest that the burden of proving coronavirus hardship will fall on the tenant, although perhaps we infer too much.

Do the proposals remove the statutory demand and winding-up from a landlord’s armoury?

At present a landlord is still entitled to serve a statutory demand, and doing so may result in a tenant paying its rent, especially in a case where the tenant can pay its rent and is simply trying to take advantage of the COVID-19 situation.
Depending on what the draft legislation says, it may still be possible to serve a statutory demand and issue a winding up petition in certain circumstances, but everyone acknowledges that this is a serious step to take and landlords will need to consider carefully if they have the confidence, and resources, to meet the new additional hurdle.

The extra limitations will make the process less attractive, meaning that landlords are more likely to exercise other enforcement action, such as CRAR or issuing debt proceedings.

Is there any change to CRAR?

No, but the government has announced that it is in the process of preparing further legislation to provide tenants with more protection from the Commercial Rent Arrears Recovery regime (CRAR).

The government has said that this will “prevent landlords using commercial rent arrears recovery (CRAR) unless 90 days or more of unpaid rent is owed.”  The good news for landlords is that if a tenant pays rent quarterly in advance, this should not affect a landlord’s ability to take action under CRAR except perhaps in September, when the quarter has only 87 days .

Can the landlord still sue the tenant for the arrears?

Yes.  The government’s most recent proposals do not appear to prevent landlords issuing Court proceedings for a tenant’s failure to pay rent.  We anticipate that landlords may well become more prepared to issue proceedings as other remedies become harder to invoke.

For material that will help you run your business, as well as details of our business continuity planning, our COVID-19 Topic Centre houses all of our resources on the topic – from crisis leadership to supply chain.

Key real estate contacts

Daniel Norris, Global Head of Real Estate

Mathew Ditchburn, Head of Real Estate Disputes

Hannah Quarterman, Head of Real Estate Planning

Our new interactive tracker is a single point of reference for you on COVID-19 real estate specific matters across our global practice. It lets you view relevant guidance and changes to legislation for each country and it also allows you to compare information across different jurisdictions:

https://www.engage.hoganlovells.com/knowledgeservices/covid-19-real-estate-developments