COVID-19: end of restrictions for commercial landlords and creditors

This alert concentrates on creditors/commercial landlords hoping to recover unpaid debts/rent where the reason for non-payment results from the impact of the COVID-19 pandemic. Note however that creditors can still present a petition if they can reasonably demonstrate that: (1) the debtor company would have become insolvent regardless of any negative burden caused by COVID-19; (2) the reason for the non-payment of the debt would have ultimately emerged even if the debtor company in question was not negatively impacted financially by COVID-19; and/or (3) the debtor company has not been financially affected by COVID-19.

Insolvency proceedings

Anxious creditors considering presenting winding-up petitions (where the reason for the debt being unpaid is the COVID-19 pandemic) should be mindful of the end of the restrictions imposed by the Corporate Insolvency and Governance Act 2020 (“the Act”).

At the time of writing, the relevant period (beginning from 1 March 2020) that restricts the presentation of winding-up petitions is scheduled to end on 31 March 2021.  The ending of the temporary measure will represent a significant change for creditors as evidence suggests that the bar for determining whether COVID-19 has had a “financial effect” on a company has been low during the restrictions period.  After 31 March 2021 it is expected that creditors will no longer need to overcome the difficult challenge of proving that a debtor company has not been financially affected by COVID-19 in order to pursue winding-up proceedings.

Options for commercial landlords

It is also expected that the temporary relief afforded to commercial tenants by the Act will end on 31 March 2021, when commercial landlords will be able to exercise the right to forfeiture and use the Commercial Rent Arrears Recovery (“CRAR”) scheme without the current restrictions.

Section 82 of the Coronavirus Act 2020 (supplemented by: (1) the Business Tenancies (Protection from Forfeiture: Relevant Period) (Coronavirus) (England) (No 3) Regulations 2020 (SI 2020/1472); and (2) The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Extension of the Relevant Period) (No.2) Regulations 2020) currently prohibits forfeiture of commercial leases for overdue rent until 31 March 2021. However, commercial landlords should be aware that the temporary measures on forfeiture only apply to non-payment of rent due under a lease, and so any other right to forfeiture can still be exercised.

In relation to CRAR, commercial landlords currently can only use the CRAR procedure on tenants who owe at least 366 days’ worth of unpaid rent (from 25 December 2020) under their lease.  It is understood that the CRAR procedure will, from 31 March 2021, revert to its original format prior to the temporary measures and allow commercial landlords to enforce non-payment of rent on their tenants where seven days or more of rent is overdue.

Commercial landlords should note that although there are restrictions on the use of CRAR until 31 March 2021, interest is not affected by these measures and will continue to accrue throughout the restrictions period.

There are also temporary provisions in place in relation to possession proceedings during the Coronavirus pandemic, in Practice Direction 55C.  The Practice Direction sets out the temporary rules that claimants (such as landlords, licensors and lenders) need to follow until 30 July 2021, dependent upon the date of issue of the claim. Claimants to a stayed claim issued before 3 August 2020 have until 30 April 2021 to file and serve a reactivation notice (which is required for the claim to be listed or heard). New claims and stayed claims brought on or after 3 August 2020 do not require a reactivation notice. Instead, the claimant is required to serve a notice on the defendant 14 days prior to any hearing setting out the claimant’s knowledge of any COVID-19 impact on the defendant and their dependents (if any).

Going forwards, creditors and commercial landlords should take note of the dates above when planning future recovery action. However, it remains to be seen whether the current temporary measures will be further extended beyond 31 March 2021 or whether there will be a tapered approach to relaxing them in order to avoid a wave of insolvencies.

If you have any queries regarding the above, please do contact our Dispute Resolution and Litigation team on 01228 552600 or 01524 548494.

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