Since the moratorium on forfeiture of commercial leases under the Coronavirus Act 2020 came into force, some commercial landlords have been turning to statutory demands and the CRAR regime as a way of recovering unpaid rent. However, the government has moved today to ban the use of statutory demands and winding up petitions until 30 June 2020, and has severely restricted the use of CRAR within the same period. This is welcome news for tenants but raises a number of important questions for landlords.
An end to statutory demands?
Statutory demands normally provide an alternative method for commercial landlords to formally demand payment of rent (over £750) within 21 days. Statutory demands are often (but not always) used by creditors as a precursor to issuing a winding up petition.
In normal circumstances, the threat of a winding up petition can provide a strong incentive for tenants to pay the rent. However, in the current circumstances where many commercial tenants are unable to trade and simply do not have any income, use of statutory demands has been criticised as aggressive.
The Government has responded to those criticisms with new measures to ban the use of statutory demands and winding up petitions for companies unable to pay their debts due to Covid-19. These measures will be in force until 30 June 2020 (in line with the timings for the existing restrictions under the Coronavirus Act 2020, and subject to extension on the same basis).
Under the new regime, the Court will review all winding up petitions on the basis of inability to pay debts. If the reason the company is unable to pay its debts is Covid-19, the Court will not allow a winding up petition to be presented, or a winding up order to be made.
This potentially leaves some scope for landlords to pursue tenants with long term arrears (which did not arise as a result of Covid-19 and the resulting restrictions). It also leaves the door open for landlords to serve statutory demands on tenants who have been able to continue to trade through the lockdown period (and have sufficient cash reserves to pay) but are nonetheless seeking rent reductions or deferrals. It remains to be seen how nuanced the Court’s approach will be in these circumstances.
Where rent remains unpaid, the CRAR regime provides a framework for tenants to appoint “enforcement agents” (previously known as bailiffs) to take control of the tenant’s goods and, if rent remains unpaid after 7 days, to sell them to settle the debt.
Since its introduction in 2014, CRAR has not been used as frequently as the old ‘distress’ system that predated it. The requirement to give 7 days’ notice before taking control of goods gives tenants every opportunity to remove goods from the property, rendering enforcement through CRAR ineffective. However, with tenants unable to access their premises, landlords had started to serve notices now to enable them to take control of goods immediately once the lockdown is lifted, without tenants being able to remove the goods in the meantime.
The recent government intervention now requires landlords to wait until there are 90 days of unpaid rent before taking steps under CRAR. This essentially means landlords cannot recover unpaid rent for the March quarter through CRAR until 30 June – in line with the restrictions on forfeiture and statutory demands.
What now for Landlords?
Commercial landlords, who may themselves subject to obligations to their own lenders or investors, are also feeling the pressure, and there has been some recognition of this by the Financial Conduct Authority, the Financial Reporting Council and the Prudential Regulatory Authority, who have issued a joint statement urging lenders to take the challenges landlords are facing as a result of Covid-19 into account when responding to potential breaches of loan covenants. While tenants have been urged to “pay what they can”, this is of limited comfort to landlords, who are now facing another 2 months of uncertainty with no means of recovery during that period.
We expect to see landlords raising arguments around the cause of rent arrears, and attempts to enforce debts which were arguably not "due to Covid-19".
High street shops and other companies under strain will be protected from aggressive rent collection and asked to pay what they can during the coronavirus pandemic.