COMMENT: While it is laudable that the government has encouraged landlords and tenants to cooperate, this simplistic approach is likely to be insufficient in many cases, argues Emma Humphreys.
On 23 April, the government announced its intention to introduce temporary restrictions on statutory demands, winding up petitions and commercial rent arrears recovery (CRAR) (see press release: New measures to protect UK high street from aggressive rent collection and closure).
The suggestion of potential changes to insolvency rules is already having an effect – with reports of process servers now refusing to undertake service of demands and petitions – despite the lack of any legal weight behind the government’s announcement as yet. It is thought that this lack of legislative detail may continue for a little while, leading to continuing uncertainty for landlords and tenants.
Moreover, there are concerns about the extent to which the government is looking to transfer some of the financial burden for the current crisis on to landlords, and whether it is achieving the correct balance between the interested parties here.
The government’s approach and its consequences
In a telling demonstration of how little the government understands about property, its first step in response to the Covid-19 crisis was to remove the remedy of forfeiture. It seemed an odd choice in a market where many tenants cannot operate from their shops and offices at present and where there is incredible uncertainty as to when the letting market may pick up. Surely, the option of forfeiture was unlikely to be the remedy of choice for most landlords?
The unintended consequence of the government’s indication of this early support for tenants was that many opted not to pay anything at all towards their rents due on 25 March. Some of these tenants will be small businesses with limited cash flow that need some time to make arrangements to secure the additional support available to them from the government. However, the list of tenants that failed to pay their March rents includes a number that are not struggling financially as a result of the current pandemic and some that many landlords believe are simply looking to take advantage of the government’s decision to reduce landlords’ remedies.
In some cases, the government’s call for tenants to pay rent where they can afford it, or at least to pay what they can, has fallen on deaf ears. Anecdotal evidence suggests that landlords have struggled to obtain engagement from a large number of their tenants since the March quarter, and some have resorted to trying other remedies such as using CRAR, serving statutory demands and/or presenting winding-up petitions.
This has presumably led to the government’s recent announcement that it intends to ban the use of statutory demands between 1 March and 30 June 2020 and to restrict winding-up petitions between 27 April and 30 June 2020. There is a reference in the government’s press release to these restrictions applying “where a company cannot pay its bills due to coronavirus”, but there are no details as to how this will be assessed by the courts.
The objective behind the proposed changes is apparently to protect high street shops and other companies under strain “from aggressive rent collection”, and the government has suggested that these entities will be “asked to pay what they can”. However, this may not address the concerns of landlords that have their own financial obligations to meet and also cannot forego income indefinitely. The government’s reassurance that it understands the “serious pressures” on landlords and is “working with banks and investors to seek ways to address these issues and guide the whole sector through the pandemic” could well prove to be of little comfort.
The current arrangements also do little in reality for tenants, many of whom may not appreciate the risk that their leases may entitle the landlord to require them to pay interest as well as any costs incurred in addressing the failure to pay rent.
For example, with any court proceedings issued to recover arrears of between £10,000 and £200,000, the standard court issue fee is 5% of the claim value, and there will be legal costs in addition to this which the tenant may well be ordered to pay. For claims with a value of more than £200,000, the issue fee is a fixed £10,000 – again likely to be payable by the tenant. There is also the fact that the moratorium on forfeiture is currently due to end on 30 June, which means that landlords may be able to take action at that time and insist on payment of two quarters’ rent (to include 24 June).
Will the approach work?
As ever, the position is not as clear-cut as having comic book villains and superheroes. While it is laudable that the government has sought to encourage landlords and tenants to cooperate “in the spirit of fair commercial practice”, this simplistic approach is likely to be insufficient in many cases. Indeed, we have already seen a similar approach fail spectacularly in the government’s attempts to support the roll-out of improved electronic communications through the introduction of the new Electronic Communications Code. With that legislation, the government’s failure to understand the most basic concerns of property owners has led to stagnation in the market for sites and bitter litigation between landowners and operators.
As the current crisis continues, landlords may well feel aggrieved if the government tries to transfer the resulting financial burden in their direction and frustrated by the continuing lack of any clear and cohesive representation of their interests. The question is whether the government is going to stand by landlords sufficiently to support them in standing by their tenants.
The proposed changes to the insolvency rules will be included within the Corporate Insolvency and Governance Bill
