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Coronavirus: A conundrum for commercial tenants

14/04/2020

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United Kingdom

The UK government has introduced a three-month moratorium on evictions of commercial tenants during the COVID-19 lockdown, but many businesses still have questions about their rights and the associated risks in these unprecedented circumstances. Here, Fieldfisher's property and insolvency experts answer some of these queries.

  What remedies could a commercial landlord use against a commercial tenant that fails to pay rent during the coronavirus lockdown?

For information on the UK government's moratorium on eviction of commercial tenants and remedies that remain available to commercial landlords, please see our previous article: Government moratorium on commercial evictions – what it means for landlords and tenants
 

What if I am threatened with a winding up petition for non-payment of rent on commercial premises?

Anecdotally, it appears that some commercial landlords are deciding to serve statutory demands on tenants to pressure them to pay rent.

A statutory demand is a precursor to serving a winding up petition (but is not obligatory).

Once a winding up petition is presented, under the Insolvency Act 1986, any disposition of the commercial tenant's property, and any transfer of shares, or alteration in the status of the company's members, is automatically void (known as a post-petition disposition), unless ratified by the court.

This effectively means that tenants are unable to carry on trading during the period between the position being served and the winding up order being made.

Commercial tenants can circumvent this by applying to the court for an order ratifying ordinary course of business expenditure – an effective but relatively onerous route.

Alternatively, a tenant may seek to injunct the landlord and prevent them from presenting a winding up petition.

This approach has yet to be tested in the courts, but consensus opinion suggests the court is likely to be on the side of the tenant in the current coronavirus lockdown circumstances.
 

Is the government planning to do anything to protect commercial tenants from insolvency during the coronavirus lockdown?

The government has intimated that it may bring in new measures to protect businesses from failing as a result of the coronavirus crisis.

These include:

Insolvency moratorium

In addition to a package of business support loans and job retention schemes, the government may introduce a new insolvency moratorium. This measure has been discussed and consulted on by politicians for a number of years prior to the coronavirus lockdown.

The moratorium would be supervised by an insolvency practitioner, but the debtor company would remain under the control of the directors. 

However, the company needs sufficient cash to keep trading through this period, so it is unclear how much it would help.

The length of the potential moratorium is also undefined, but will most probably be between 28 days and three months. 

Lawyers and the business community are waiting to see how the government decides to act, but assuming a moratorium is implemented, this is likely to prevent winding up petitions being presented and legal proceedings being commenced or continued against commercial tenants.

Excluding ipso facto clauses

The government could also introduce a new provision to exclude 'ipso facto' clauses, i.e., clauses that permit stopping further provision of (yet to be specified) supplies because the debtor has entered an insolvency process. 

Again, this will most likely require the company to have sufficient funds to pay for new supplies, so it is not obvious how much it will help.

Suspension of wrongful trading rules

A temporary suspension of wrongful trading provisions from 1 March until 1 June 2020 has been announced by the government.

Presumably, this means additional debts incurred during that period would not form part of any award against the directors for wrongful trading, but the directors could still (separately) be sued for breach of duty.

Lawyers and the business community are waiting to see the precise wording of this provision, to gauge how effective measure is likely to be.

A new CVA-style scheme

Finally, the government could introduce a new independent scheme, similar to a company voluntary arrangement (CVA), that may allow the terms of commercial leases to be varied (which is not currently possible under a CVA).

For more information and our analysis of the potential impact of changes to UK insolvency laws, please see our previous article: Will the UK's new insolvency measures help companies affected by coronavirus?

CBILS

For information and our analysis of CBILs, please see our previous article: Government Backed SME Lending | Coronavirus Business Interruption Loan Scheme.

Wages support

For information and our analysis of the government's job retention schemes, please see our previous articles: COVID-19: worker pay protection – what it means for businesses and COVID-19: Coronavirus Job Retention Scheme – new guidance for businesses.
 

Will relaxing insolvency rules to disapply ipso facto clauses mean that forfeiture of leases on grounds of insolvency becomes difficult to implement?

This will depend on whether or not ipso facto clauses (see above) cease to apply if new rules come in.

It seems likely that any company trading from commercial premises will require those premises as an 'essential service', so a right to forfeit on grounds of insolvency could be construed as an ipso facto clause.

There are other defaults, in addition to insolvency, that usually allow commercial landlords to forfeit leases (such as non-payment of rent or breach of other terms of the agreement).

While the insolvency trigger for forfeiture might be disabled as a consequence of new rules, and the right to forfeit for non-payment of rent has been temporarily suspended under the Coronavirus Act) other triggers will likely remain to allow forfeiture based on the particular forfeiture clauses in commercial leases.

 
If a commercial tenant has more than one landlord, is there a risk that paying one rather than another could be viewed as a preference?

The question of preference only arises if a commercial tenant enters an insolvency process after it has paid its rent.

The administrator or liquidator will look at any payments made prior to insolvency and decide whether there was a preference (i.e., paying one creditor in preference to another).

To bring a successful preference claim, the insolvency practitioner must show that there was a desire by the insolvent party to prefer. If a payment was made to a party connected to the insolvent tenant (for example, if the landlord was the tenant's parent company), that desire is presumed.

If the commercial tenant has no connection to the party it pays ahead of another, and can show that it was making the best decision commercially for the company, this is unlikely to be considered an actionable preference.

This is important both for the recipient of the payment and the directors of the tenant company, who might otherwise face disqualification or claims for breach of duty.

 
If a commercial tenant cannot move out on a break date due to COVID-19 and the landlord is not sympathetic, will the courts help?

This largely depends on what the tenant can negotiate with their landlord. It may be possible to negotiate extensions to break dates (depending on the attitude of the landlord), tied in with rent holidays and lease extensions.

However, it should be remembered that break clauses are strictly construed and will usually require a property to be given back subject to certain conditions (set out in the break clause) for the break right to operate. 

This may include the provision of vacant possession and/or for the premises to be reinstated (and all tenant's fit out to be stripped out), which may be a problem for tenants to comply with because of the coronavirus lockdown.

In these cases, the tenant will most likely have to ask a court to intervene, and in the circumstances, the court may be sympathetic.

However, tenants should do what they can (within the constraints of the lockdown) to comply with the break conditions so they can demonstrate that the only non-compliance has been necessitated by the lockdown.

Even then, there is a risk for the tenant, but at least they will have minimised it as much as possible.

For more information and our analysis of the impact of the coronavirus lockdown, please see our previous article: How will coronavirus impact UK commercial landlords and tenants?
 
For expert advice on these and other property-related issues, please make contact with our team of specialist contentious real estate experts.

For more information please visit Fieldfisher's COVID-19 content hub, we are updating this daily with up-to-date information.
 

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