COVID 19 – Temporary restrictions on Landlords

On 23 April 2020 the Government announced a temporary ban on landlords using statutory demands (made between 1 March 2020 and 30 June 2020) and winding up petitions (presented from Monday 27 April through to 30 June,) where “a company” cannot pay its bills due to coronavirus. The measures will be included in the Corporate Insolvency and Governance Bill.

This announcement was the result of the previous temporary ban on landlords being able to distrain for unpaid rent or taking steps to forfeit the lease, and the indications that landlords were going to use petitions instead.

The use of the word “company” rather than “tenant” is unfortunate because it leaves it unclear whether the ban will only apply where the tenant is a company, or whether it will also apply to business tenancies where the tenant is an individual. The assumption being made is that it will apply to individual business tenants because it is specifically designed to protect high street shops.

It is rare for legislation to have retrospective effect and as the Bill has yet to be passed by Parliament, there is uncertainty about how the Bill is going to achieve the Government’s stated aims. The likelihood is that it will say that:

• A landlord cannot serve a statutory demand or present a petition before 1 July 2020
• A bankruptcy order or winding up order cannot be made on any outstanding petition before 1 July
• The period of the temporary ban can be extended by secondary legislation

Some commentators have suggested that there is a window to present a petition before the temporary ban comes into effect. Unless the ban is extended beyond 30 June, it is unlikely to have much effect on petitions presented before the ban takes effect. This is because there is usually a period of about 6 weeks between the date a petition is issued and the court hearing anyway. Also, it is unlikely the courts will fix a hearing date before 1 July if they recognise that the petition is in respect of unpaid rent, bearing in mind also the problems associated with court hearings having to take place remotely.

Presenting a petition is a high-risk strategy for the landlord which needs to be thought through. Whilst petitions are used as an aggressive debt recovery process, bankruptcy and winding up proceedings are a collective remedy and you can only have one petition in existence at any one time. Payment of the petition debt does not automatically result in the bankruptcy or winding up proceedings coming to an end. For example, another creditor can take the petition over.

What about the effect of sections 127 and 284 Insolvency Act 1986?

These sections say that any disposition of property is void once the petition has been issued, if a winding up order or bankruptcy order is subsequently made. This is unless the Court has given approval to the disposition. Will the Bill contain temporary provisions that suspend the operation of these sections? If not, then a landlord presenting a petition now will cause the tenant major problems. But  if the threat to present a petition does not persuade the tenant to pay up, the landlord may well score an own goal by actually presenting a petition if that leads to the tenant deciding to shut the business or to the bankruptcy or winding up of the tenant. This would leave empty premises which the landlord could find difficult to re-let for a long time with the landlord potentially having to pay the business rates once the 3 month relief period expires.