COVID-19: What are the new far-reaching restrictions on recovery of rent arrears?

The Government's decision that it will temporarily ban landlords from serving statutory demands or issuing winding up petitions has sent shockwaves through much of the investment property market. In a press release on 23 April 2020, the Government announced that statutory demands served on "companies" between 1 March and 30 June 2020, and winding-up petitions presented from 27 April 2020, will be banned where the reason for non-payment of the monies set out in the demand or petition is that a tenant "cannot pay its bills due to coronavirus". The measures build on the protections already afforded to all tenants in response to the COVID-19 pandemic, to "help ensure that [tenants] do not fall into deeper financial strain". They supplement the suspension of a landlord's right to forfeit a lease for non-payment of rent, whether by peaceable re-entry or the issue of proceedings, announced as part of the Coronavirus Act 2020, and supplemented by the Civil Procedure Rules Practice Direction 51Z. At the same time, the Government has announced further protection for tenants, as it has imposed restrictions that a landlord's right to recover arrears under the Commercial Rent Arrears Recovery scheme (CRAR) and directly enforce against tenants' assets as set out in the Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020. More on this below.

At present, there is very little detail surrounding the new restrictions on statutory demands and winding up petitions, and the only source of information is the Government press release. Many questions can be posed and requests for clarification made in relation to the timing, scope and impact of these changes, including:

• How will a court interpret the phrases "cannot pay" and "due to coronavirus"? Many businesses will have experienced cash flow issues due to the current restrictions on trade. Other businesses will have already been in financial difficulties (and possibly also arrears of rent) before the pandemic. It seems that it may still be possible to present a winding up petition to the court, but where a winding up petition is presented on the basis that a company is unable to pay its debts, the court will be called on to determine why. Where a company's inability to pay its debts is due to COVID-19, the petitions will not be presented and winding up orders will not be made. However, similar press release wording was used before the suspension of the right to forfeit, and when the legislation itself was published and passed, the linkage between arrears and COVID-19 was not included.
• Will the measures, like the protection from forfeiture provisions, apply equally to all tenants and lawful occupiers of commercial premises, whatever the sector in which they operate, whether the tenant remains open for business or faces any restrictions on trade, and regardless of the tenant's financial standing?
• Will these new restrictions also apply to service of a statutory demand on an individual or partnership (the press release talks only of companies), and presentation of bankruptcy petitions (the press release talks only of winding-up)?
• The information provided to-date does not suggest that there would be a similar ban on other debt enforcement methods such as commencement of Court proceedings so as to obtain a County Court Judgment (CCJ) or, for example, drawing down on a rent deposit. It is also not clear as matters stand whether the legislation would prevent claims against guarantors of tenants or against former tenants or their guarantors, eg under an Authorised Guarantee Agreement.

By way of background, a statutory demand is a written demand for payment of an undisputed debt (such as rent), and can be served on an individual, partnership or a company. A statutory demand can only be served if:

• the debt is liquidated, ie for a specific amount that has been fully and finally ascertained (such as principal rent, or a reconciled final service charge payment);
• the debt is undisputed; and
• the debt exceeds £750 (in the case of a company) or £5,000 (in the case of an individual).

It is not in itself a method of debt recovery, but has long been an effective way to put pressure on a tenant to pay the amounts owed. The real "punch" behind a statutory demand is the consequence of non-payment: if the sums specified in the statutory demand are not paid within 21 days of service of the demand, that non-payment is treated as evidence of the tenant's "inability to pay the debt" and opens the tenant to the risk that it could be (in the case of an individual) declared bankrupt or (in the case of a company) placed into compulsory liquidation, and ordinarily entitles a landlord to present a compulsory winding-up petition to the court.

CRAR is a statutory scheme under which landlords of commercial property may take "self-help" measures to recover principal rent by serving an initial notice and then instructing an enforcement agent to seize goods from the demised premises and sell them to recover the arrears and the landlord's costs. A key limitation of CRAR was always that, in order for a notice to be served and therefore begin the CRAR process, a minimum of seven days' principal rent (CRAR cannot be used in respect of service charge or insurance payment, even if these are reserved as rent) had to be outstanding. From 25 April to 30 June 2020 (although this period may be extended), CRAR can only be used where an amount equal to 90 days' net rent (ie more than a quarter's rent) is outstanding, thus further limiting landlords' right to recover arrears.

The restrictions on serving statutory demands and presenting winding-up petitions will form part of the Corporate Insolvency and Governance Bill 2020, which has not yet been published. We await it with interest. Watch this space.

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