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Corporate Insolvency and Governance Act 2020 – what’s changed for commercial landlords and tenants?

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By Jane Armitage

3 Sep 2020 | 1 minute read

The Corporate Insolvency and Governance Act 2020 (CIGA) was passed on 25 June 2020 with the aim of assisting recovery from the Covid-19 pandemic, and brings with it significant changes both permanent and temporary to insolvency law in the UK. We previously reported on the content of the bill when it was hurriedly passing through parliament, and this article focuses on the impact on commercial landlords and tenants.

Key measures

A new “breathing space moratorium” provision allows directors of companies which are struggling to file documents with court to obtain moratorium protection for a period to formulate a recovery plan.  This measure had already been proposed by the government before the pandemic.  During the moratorium no action can be taken by landlords against the company without leave of the court.  In the first instance the moratorium lasts 20 business days, but this can be extended.

During the moratorium enforcement or payment of debts that fell due before the moratorium, or which fall due during the moratorium period and which are not specifically carved out, is restricted so that the company has a payment holiday on pre-moratorium debts.  One of the debts which is exempt from the payment holiday is rent in respect of a period during the moratorium.  However, during a moratorium landlord remedies are restricted so they cannot exercise a right of forfeiture or any other enforcement action except with the permission of the court.  This measure will provide tenants with an alternative method of protection from landlords during this difficult period provided rent is being paid during the moratorium period.

So called ipso facto clauses in contracts for the sale of goods and services will no longer allow a contract to terminate because the company has entered an insolvency procedure.  The explanatory notes to the Act state that agreements such as licenses, property leases and agreements for the sale of land or property are not characterised as contracts for the supply of goods and services, therefore they are not covered by the prohibition of such termination clauses.  The explanatory notes do not form part of the Act and have not been endorsed by parliament, but this provides landlords with some comfort that usual forfeiture clauses are not devoid of effect subject to usual moratorium provisions.

The Coronavirus Act 2020 created a moratorium period within which commercial landlords cannot enforce their right of forfeiture of leases for unpaid rent – this has currently been extended to the end of September.  CIGA puts in place measures to temporarily stop winding up based on statutory demands for the period 1 March 2020 until 30 September 2020.  In addition an extra condition must be satisfied before a winding up order can be obtained against a company on the grounds that it is unable to pay its debts; the creditor must prove that Covid-19 has not had “a financial effect” on the company or that the relevant ground for the petition would have arisen even if Covid-19 had not had a financial effect on the company.

This will apply to any winding up petition presented after 27 April 2020 and relying on a statutory demand issued between 1 March and 30 September.   Even where debts pre-date Covid-19 it is possible that a debtor could argue that Covid-19 had an impact on the debtor being able to pay.  A creditor relying on the debts being due before Covid-19 as a reason to commence proceedings will need to be able to provide evidence that Covid-19 had no effect on the company’s inability to make payments.

Key measures

A new “breathing space moratorium” provision allows directors of companies which are struggling to file documents with court to obtain moratorium protection for a period to formulate a recovery plan.  This measure had already been proposed by the government before the pandemic.  During the moratorium no action can be taken by landlords against the company without leave of the court.  In the first instance the moratorium lasts 20 business days, but this can be extended.

During the moratorium enforcement or payment of debts that fell due before the moratorium, or which fall due during the moratorium period and which are not specifically carved out, is restricted so that the company has a payment holiday on pre-moratorium debts.  One of the debts which is exempt from the payment holiday is rent in respect of a period during the moratorium.  However, during a moratorium landlord remedies are restricted so they cannot exercise a right of forfeiture or any other enforcement action except with the permission of the court.  This measure will provide tenants with an alternative method of protection from landlords during this difficult period provided rent is being paid during the moratorium period.

So called ipso facto clauses in contracts for the sale of goods and services will no longer allow a contract to terminate because the company has entered an insolvency procedure.  The explanatory notes to the Act state that agreements such as licenses, property leases and agreements for the sale of land or property are not characterised as contracts for the supply of goods and services, therefore they are not covered by the prohibition of such termination clauses.  The explanatory notes do not form part of the Act and have not been endorsed by parliament, but this provides landlords with some comfort that usual forfeiture clauses are not devoid of effect subject to usual moratorium provisions.

The Coronavirus Act 2020 created a moratorium period within which commercial landlords cannot enforce their right of forfeiture of leases for unpaid rent – this has currently been extended to the end of September.  CIGA puts in place measures to temporarily stop winding up based on statutory demands for the period 1 March 2020 until 30 September 2020.  In addition an extra condition must be satisfied before a winding up order can be obtained against a company on the grounds that it is unable to pay its debts; the creditor must prove that Covid-19 has not had “a financial effect” on the company or that the relevant ground for the petition would have arisen even if Covid-19 had not had a financial effect on the company.

This will apply to any winding up petition presented after 27 April 2020 and relying on a statutory demand issued between 1 March and 30 September.   Even where debts pre-date Covid-19 it is possible that a debtor could argue that Covid-19 had an impact on the debtor being able to pay.  A creditor relying on the debts being due before Covid-19 as a reason to commence proceedings will need to be able to provide evidence that Covid-19 had no effect on the company’s inability to make payments.

For landlords, these additional limitations on steps they can take against tenants for non-payment of rent may be disappointing particularly when coupled with the extension of the restriction on using CRAR until 30 September unless 189 days or more of rent is owed.  It remains to be seen whether the 30 September 2020 date will be extended.

What options remain for landlords to ensure they are paid?

  • Landlords can look at existing security.  They can still pursue guarantors or former tenants under leases as there appears to be no restriction on this.  If premises are sublet, landlords could require subtenants to pay rent direct. In addition, landlords can call on rent deposits, though given the risk of insolvency, consideration should be given to whether this is the best use of such funds and the ability of the tenant to top it up during this uncertain period. 
  • Forfeiture on grounds other than non-payment of rent is still an option. 
  • A debt claim could be brought but this incurs significant cost and current court delays mean that it will not be dealt with quickly.  However, this might be more appealing where a tenant has assets over which a charging order could be made. 
  • Landlords may wish to investigate whether their business interruption insurance can assist, at least for the period of lockdown.  However, scrutiny of the insurance policy (including loss of rent) documents will be needed in order to assess the situation and this is unlikely to assist long term.  The outcome of the current test case brought in the High Court by the Financial Conduct Authority is eagerly awaited.

A more realistic and reputationally favourable option for landlords may be to take note of the recently published Code of Practice for commercial property relationships during the Covid-19 pandemic.  This promotes parties acting in good faith to sustain landlord and tenant relationships impacted by lockdown restrictions.  It is voluntary but there is potential for reputational damage if it is ignored.  As we commented in our previous article, the incentive for tenants to engage may be considered limited whilst the restrictions on landlord enforcement action remain in place.  However, for landlords the Code provides a basis on which to approach their tenants and aim to negotiate a sustainable rent payment arrangement to benefit both parties.  Landlords will nonetheless need to bear in mind requirements of the lenders given that loan documentation may restrict their ability to grant concessions unless lender consent is obtained.

On the other side of the fence, tenants would be wise to seek early negotiation with landlords to protect their future occupation given that the current restrictions inhibiting the landlord's ability to recover rent payments are set to end on 30 September 2020.

This article is a general summary of the law and it is not intended to replace legal advice for your specific circumstances.  Please contact Carol Philips or Joanne Rumley if you would like to discuss further.

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