Update on statutory demands, rent arrears and the options available

On 9 September 2021, the government announced measures to phase out the existing restrictions on statutory demands and winding-up petitions under the Corporate Insolvency and Governance Act 2020 (“CIGA 2020”).  The temporary measures were introduced to protect businesses in financial distress during the pandemic from being forced into insolvency.  However, with the economy slowly returning to its pre-covid condition, the current restrictions will be lifted on 1 October 2021 and replaced by a set of limited restrictions for winding-up petitions which are presented between 1 October 2021 and 31 March 2022 (“Relevant Period”).

The principal consequences of the new measures are that during the Relevant Period:

• a creditor may not present a winding-up petition in respect of commercial rent that is unpaid because of the financial effect of coronavirus. This provision supports the extended moratorium on forfeiture for commercial tenants;
• a creditor may not present a winding-up petition if it is for a debt or debts totalling less than £10,000;
• a creditor must demonstrate that they have sought to negotiate repayment of a debt, before seeking to wind up a company by sending written notice to the company giving them 21 days to respond with proposals for repayment. A creditor may, however, apply to court for an order that they do not need to deliver notice or give the debtor 21 days to make a satisfactory proposal.

It remains to be seen whether the changes will have the desired effect in terms of balancing the interests of commercial landlords and small businesses.  Whilst many landlords will welcome the changes, they should proceed with caution as they will need to prove that non-payment of the debt is not related to the pandemic. One difficulty for many landlords is that there is a risk that the tenant’s reserves may have diminished by the time they are able to take enforcement action.

Other options available

Whilst legislation surrounding statutory demands and winding-up petitions is changing, it is important to remember these are not the only remedies available to landlords for non-payment of rent. The relevant options will depend on the specific circumstances. In addition, landlords and tenants should keep in mind that if a tenant is also in breach of other terms of their contractual agreement with their landlord (for example, by causing damage to the property), which gives rise to a right to forfeit, the landlord is still able to move to evict them.

If a tenant has built up rent arrears, the first step for the landlord, before taking enforcement action, should be to communicate with the tenant, gather more information about the tenant’s personal circumstances and how the tenant may be able to pay off their arrears.  An early conversation between a landlord and a tenant who is struggling to pay their rent can help to achieve a plan and avoid litigation. Landlords and tenants have agreed a variety of arrangements over the last 18 months. Examples include reaching a temporary agreement not to take enforcement action for a period of time and instead accept a lower rent or agree a plan to pay off arrears at a later date. It may be cheaper for the landlord to accept a lower rate of rent than to arrange for a new tenant to move in.

Other changes – past……..

The changes to the restrictions on statutory demands and winding-up petitions are the latest in a series of legislative amendments aimed at phasing out the various interim measures that were introduced over the last 18 months to safeguard businesses.

The moratorium on evictions of commercial tenants for non-payment of rent applies until 25 March 2022, as does the restriction on the use by landlords of the Commercial Rent Arrears Recovery (“CRAR”) process. For CRAR to be used, the necessary total number of days’ outstanding rent will remain at 554 days.

……..and future

The reality is that whilst many businesses are recovering from the effects of the pandemic and forced closures, many will not be in a position to settle the significant rent arrears that have accrued by the expiry of the interim measures. Earlier this year the government announced a “call for evidence” to consider the question of how to address those arrears.  After considering the evidence put forwards by landlords and tenants the government announced plans to introduce new legislation to “ringfence” outstanding rent arrears that accrued during the forced closures, and to introduce a new binding arbitration process. That process will apply where a landlord and tenant cannot reach an agreement in relation to those ring-fenced arrears.  

The Government indicated in its announcement, which can be found here, that under the new system:

• landlords will be able to exercise their rights to evict any tenant for the non-payment of rent debt incurred prior to March 2020 and from the end of the ringfenced period;
• landlords will be able to evict any tenant who falls outside the scope of the arbitration legislation over the non-payment of rental arrears accrued at any time. The new legislation will only apply debt due from tenants “impacted” by COVID-19 business closures;
• landlords will also be able to charge interest on rent incurred from the end of the ringfenced period onwards, if such interest payments are included in the terms of the lease;
• tenants who are able to pay rent should do so, rather than simply stating they cannot do so due to closures. It is possible a financial test could be introduced in this regard to ensure tenants who can pay are not benefiting unjustly from the legislation; and
• tenants will be bound by the decision of the arbitrator and will have to pay rent debts accrued during the ringfenced period in accordance with that decision.

The detailed legislation is awaited, however, this is certainly something to look out for.