3 June 2020

What next re commercial rent collection during COVID-19?

Following the publication of the proposed Corporate Insolvency & Governance Bill ("the Bill") on 20 May 2020, the Government then issued a Press Release on 29 May 2020 announcing its intention to introduce a Code of Practice by 24 June 2020 to provide landlords and high street business tenants with clarity and reassurance over rent payments. These initiatives follow on from the Government having already passed legislation:-

  1. Preventing forfeiture of any Lease up to 30 June 2020;
  2. Preventing the exercise of Commercial Rent Arrears Recovery ("CRAR") for less than 90 days rent.

A working group of landlord and tenant representative bodies has been established to develop the Code in the joint interests of landlords and tenants. They have already begun discussions given the urgency. It is expected that tenant default for the June quarter will be far greater than for the March quarter even though retail tenants can commence business from 15 June 2020.

Pursuant to the Bill, there will be an effective ban on Winding Up Proceedings being used to collect rent until July 2020 and tenants in financial difficulty will be able to enter into payment moratoriums (supervised by a Licensed Insolvency Practitioner) to give themselves time to save themselves as going concerns.

In short, and assuming, as is likely, the Bill is passed shortly with no major amendment, the current and future position as to rent collection from high street tenants, with particular focus on the June quarter, is as follows:-

  • Much will depend on what the Code eventually provides and how relevant it will be? It is proposed to be voluntary, at least to begin with, and to provide a framework for landlords to work with tenants who claim they cannot pay in order to find some middle ground, possibly through mediation. Tenants who can pay, whether from their own resources or the various loans being made available, will not be protected by the Code and tenants who claim not to be able to pay are expected to provide landlords with their relevant financial documentation to substantiate such inability (but will they actually do so?). Substantial landlords who can afford to give tenants some needed breathing space or concessions are expected to do so.
  • Given that the Code is intended to be voluntary, it is anticipated that, to force landlords to follow the Code, the Government will have to extend the restrictions on forfeiture, CRAR and winding up for, at least, high street tenants. But if this is the case, then it is questionable what real purpose the Code will serve as the landlords' hands will be effectively tied anyway?
  • There is still no restriction on landlords simply issuing debt proceedings online to recover sums outstanding, costs and interest. This is primarily because this will take some time anyway and the tenant can always ask the Court for additional time to pay. However, the Code will put pressure on landlords not to take any action unless this is really necessary and appropriate and the fear is tenants will use the Code to delay any such action.
  • Whilst many tenants are clearly unable to pay, their financial position is often very unclear to landlords because:-
    • Tenants often refuse to provide confidential financial information;
    • Tenants can seek loans under the various Government schemes (and the Government has made clear that loans can be used to pay rents);
    • Various tenants are claiming to be insured under business interruption policies but are having to do battle with their insurers to establish they are covered for their losses (including their rental liabilities). The Financial Conduct Authority has now announced it is taking proceedings next month against 8 insurers to test the wording of 17 different policies which tenants claim do provide cover for Covid 19 but which insurers such as Hiscox claim they do not.
  • Many landlords have already granted tenants concessions or deferrals (often in return for the tenant extending the lease or waiving a right to break). But, given some landlords are apparently insured for loss of rent under their building insurance policies, those who have some cover have to be careful about waiving any rent and not actively pursuing recovery to mitigate their loss. But, once again, the insurance position is very unclear at present.
  • For the most part, landlords need to be reassured that tenants are not trying it on (especially large retailers) other landlords and creditors are not receiving preferential treatment and that they will not be prejudiced by delaying action through the tenant going into a CVA or Administration without having made any substantial payment beforehand. Until this happens, if it ever does, landlords will have to continue doing their level best to make recoveries where they can without delay.

Disclaimer

The current global crisis is evolving rapidly, and the rules and guidance for individuals, companies and other entities to manage its implications are similarly fast moving. Notes such as this may be out of date almost as soon as they are published. If you have any questions prompted by this article or on any other matter relevant to you, please get in touch with your usual contact at Forsters.

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