The return of winding up petitions to the commercial property world

Tuesday 5th April, 2022

Alongside various other governmental support measures, the Corporate Insolvency and Governance Act 2020 introduced certain permanent and various temporary initiatives to help protect companies adversely affected by the consequences of Covid-19, including several lockdowns implemented during the pandemic.

While the majority of these temporary measures expired during the course of last year, certain restrictions on issuing winding-up petitions were extended until 31 March 2022. However, these restrictions have now finally come to an end, allowing the usual winding-up regime under the Insolvency Act 1986 to be reinstated to its pre-pandemic operation from 1 April 2022. There is one exception to this – the Commercial Rent (Coronavirus) Act 2022 (the “CRCA 2022”), which came into force on 25 March 2022, has the effect of ringfencing certain arrears as “protected rent debts” in respect of which a landlord will not (at least initially) be able to present a winding-up petition against a business tenant. Protected rent debts consist of arrears of “rent” (which for these purposes includes service charge, insurance and interest payments) accrued during a period of the tenant’s forced closure as a result of a mandated lockdown. This moratorium is limited in time and will last until the earlier of an arbitration process being instituted in accordance with the process set out in the CRCA 2022 or, if there is no recourse to the arbitration process, six months after the CRCA 2022 was passed. Rent debts that are not protected rent debts are not within the scope of the CRCA 2022 and therefore landlords can now, as of 1 April 2022, commence winding-up (or bankruptcy) proceedings in respect of these in the usual way.

An election to trigger the arbitration process (which is legally binding) may be made by either an eligible landlord or tenant in respect of a business tenancy where no agreement has until then been reached between them in relation to protected rent debts. The aim of this process is to assist commercial landlords and tenants in the resolution of disputes regarding protected rent debts and to bring some certainty back to the market. However, the arbitration process should be seen as a last resort with the parties ideally pursuing their own settlement arrangements beforehand.

There is a framework for the use of the arbitration process based on an updated Code of Practice. The Code states that a tenant who can pay its rent debt in full should do so and that, in the first instance, a tenant unable to pay in full should negotiate with its landlord in the expectation that the landlord shares the burden where they can, and only as far as necessary, by waiving some or all rent arrears or giving further time to pay.

As we move into April, this remaining limited moratorium for commercial tenants may come to be seen as little more than a sticking plaster. Not only is it only available to commercial tenants, only for protected rent amounts and only for a limited period of time, it must be seen against an economic backdrop swirling with adverse indicators. There is a macro-environment perfect storm brewing – the lingering effects of the pandemic, Brexit and global supply chain crises merging with or being exacerbated by the conflict in Ukraine and the implications for energy supplies and commodity shortages which are already being felt as UK inflation surges at its fastest rate for 30 years and potentially significant interest rates to address that appear on the near horizon. Against this background, the lifting of these restrictions on the use of winding up as an enforcement tool will be a relief for some landlords where tenants have abused the moratorium to withhold rent that they could afford to pay and for reasons unconnected with lockdown closures. For tenants, it is hopefully the beginning of a new chapter for resolving those disputes in a constructive manner that perhaps sets the tone for the rest of the lease terms. However, the ability again for commercial landlords to resort to winding-up proceedings for what might be modest amounts of unpaid, unprotected rent debt may be the final straw for many tenants which sees them finally collapse as two years of government support measures finally vanish.

It remains to be seen whether the pent-up frustration of landlords will mean that the Courts will be inundated with winding-up petitions, if landlords and tenants will work collaboratively to deal with the £7 billion-worth of rent debt accrued during the pandemic by businesses or if matters will be left in the hands of arbitrators to determine where the balance of fairness lies. The extent of other financial and market difficulties – for not just tenants, but also landlords – may yet have a far greater effect on the futures of commercial landlords and tenants. What the next few months holds will be eagerly awaited, but it seems to go without saying that not many will feel particularly upbeat.

Should you have any questions arising from this note or require any advice concerning a specific situation, please contact Brett Israel or Eleanor Mill of our Business Restructuring Group.

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