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More Breathing Space for Commercial Property Tenants

23rd June 2020

The measures taken by the Government to ease the economic impact of the COVID-19 lockdown have been unprecedented.

Alongside those steps that might be defined as direct cash injections, the Coronavirus Job Retention Scheme, ‘Bounce Back’ loans etc., there are also measures contained in the Coronavirus Act 2020. These are designed to support residential and commercial tenants by preventing them from being evicted for non-payment of rent during the “relevant period” which runs from 26 March until 30 June 2020, and could be extended further if the Government sees fit.

Whilst such measures support tenants, they create an opposite effect for landlords if their tenants are unable or unwilling to pay their rent.

This led some landlords to explore the other legal remedies that remained available to them, including issuing a money claim for the rent arrears, and/or (where the tenants were a limited company) serving them with a statutory demand and then filing a winding-up petition if payment was not made.

Landlords are still able to pursue legal proceedings against their tenants for non-payment of rent during the “relevant period”, and there has been no indication from government that this would change if the relevant period is extended. A County Court claim however is by no means a quick remedy given the backlog of new cases that the Courts are having to deal with.

The Government and the Courts have also recognised the loophole that a winding-up petition presents to the protections afforded to tenants under the Coronavirus Act 2020, and they have taken steps to close it.

The Corporate Insolvency and Governance Bill 2019-21 (CIBB) was published on 20 May 2020 and is currently making its way through parliament. It includes restrictions that seek to prevent the presentation of winding-up petitions after 27 April 2020 where they rely on a preceding statutory demand served during the relevant period (or one month after the CINN comes into force, if later) (paragraph 1, Schedule 10, the Bill) . The CIBB has reached its Report stage, which is due to take place today. This will be followed by a third reading and then, subject to any further amendments, Royal Assent, which enshrines the various measures in law.

As the CIBB has not yet been passed, a prudent landlord may well seek to get their winding-up petition in whilst they can. However, the recent decision in the High Court case of A Company (Injunction to Restrain Presentation of a Petition) [2020] EWHC 1406 (Ch), suggests that Courts are willing to take a robust approach to ensure that landlords are not able to circumvent the protections intended by Government.

The case concerned an unidentified High Street retailer who was the tenant of a commercial property.

The landlord was set to present a winding up petition against the retailer for non-payment of rent, but before they did, the tenant sought an injunction to restrain them from doing so.

The tenant said it was unable to pay its rent due to the effects of the COVID-19 restrictions, and relied upon the prohibition on the presentation of winding up petitions contained in the CIBB. It argued that under the CIBB the winding-up petition would be deemed void unless the landlord could demonstrate that COVID-19 had not had a ‘financial effect’ on the tenant, or that the grounds for winding up would be satisfied even if COVID-19 had not happened. The landlord argued amongst other things that the tenant should not be able to rely on those provisions because the CIBB had not yet become law.

This is not the first time that the Court has been asked to grant relief based on impending legislation that has not yet come into force. Previous applications have been granted on that basis.

The Judge in this case said that he was confident that the CIBB would be passed before the end of June 2020, and he was therefore entitled to take its provisions into account when making his decision.

He concluded that the provisions of the CIBB meant any petition presented to the Court by the landlord would fail because,

  • Under Schedule 10 to the CIBB (once enacted), the Court would have to consider whether COVID-19 had a financial effect on the tenant before the presentation of the petition. If it had, the Court could only make a winding-up order if it was satisfied that the facts on which the petition was based would have occurred even if COVID-19 had not had a financial effect on the company; and
  • there was a strong case in his view that COVID-19 had had a financial effect on the company before the presentation of the winding-up petition, and that the facts upon which any such petition would be based would not have arisen but for the financial effects caused by COVID-19.

Therefore, the Judge granted the injunction and the landlord was prevented from presenting its petition.

Another significant factor in this case, is that the presentation of a winding-up petition can have dire consequences for a company. The Court therefore felt it was just to protect the tenant from those potential consequences, particularly in circumstances where the petition was likely to be deemed void in any event.

Landlords and Tenants Take Note

The CIBB is likely to be passed by the end of June or shortly thereafter. Once in force, it will mean:

  1. A petitioner cannot present a winding-up petition that is based on a statutory demand that was served between 26 March and 20 June 2020 (or later if the relevant period is extended).
  2. Any person presenting a winding-up petition after 27 April 2020, in addition to proving that the debtor is insolvent or unable to pay its debts as they fall due, must also demonstrate that:
  • they have reasonable grounds for believing that the coronavirus has not had a financial effect on the debtor; or
  • that the debt issues with which the petition is concerned would have arisen in any event.
  1. Where a petition that was presented between 27 April 2020 and the CIBB coming into force, was made without the creditor having the required reasonable belief grounds, the Court has the power to make an order remedying the position, so that it is as if a petition had never been presented.

In light of the above, there is little point in creditors presenting winding-up petitions unless they can show that the grounds for the petition would have arisen without the financial impact of COVID-19. This is likely to be difficult unless the debtor had a poor credit history prior to the COVID-19 crisis.

The clear message from Government and the Courts is for landlords and businesses to work together to reach the kind of arrangements that enable both to emerge intact, like rent holidays, reductions or a return to turnover based rents.

Whichever side of the issue you find yourself on, if you would like to discuss the options available to you with an experienced commercial dispute lawyer, please speak to Adam Pike on 01543 431 197 or email apike@ansonssolicitors.com

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