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Covid-19 Real Estate: Have Statutory Demands been banned between Landlords and Tenants?

  • 24 April 2020 24 April 2020
  • UK & Europe

  • Coronavirus

Covid-19 Real Estate: Have Statutory Demands been banned between Landlords and Tenants?

Government guidance issued late on Thursday afternoon says that emergency legislation will be enacted to prevent "aggressive" pursuit of rent arrears by landlords by introducing a temporary "ban" on statutory demands and winding up petitions, where a tenant cannot pay its rent for COVID-19 reasons.

As with all such hastily put together announcements, the devil will be in the detail but the plans as per the announcement raise more questions than answers and may well lead to more, rather than fewer, disputes.

The positon as it currently stands is set out below.

1. Will landlords still be able to serve statutory demands for rent arrears?

Although the announcement talks about restraining the use of statutory demands, our understanding is that the answer is yes. It is very difficult to see how the legislation could prevent statutory demands being used, given that their service involves a unilateral act by a creditor outside of a formal Court process.

2. Are landlords actually being prevented from issuing winding up petitions?

It is not clear.  The note suggests that winding up petitions claiming that the company cannot pay its debts will be "first reviewed by the Court" to determine whether the company’s inability to pay is the result of COVID-19.

It then says that no petition may be "presented" or any winding up orders made "...where the company’s inability to pay is the result of COVID-19".

It is very unclear when this Court "check" will take place.  Normally winding up petitions are issued and advertised before any hearing or judicial scrutiny.  It is at the hearing that any representations on the part of the debtor are made.

It is also not clear whether what is intended is that the Court will do a check of petitions when they are presented, but before they are actually issued, or whether this will take place at the hearing of the petition.

If it is the former, then there is no opportunity for either party to make representations, and the Court must make a guess.  If it is the latter, then much damage may have already been done following the advertisement of the petition. Following that, the usual course would be that any bank will freeze the bank accounts of the company that is subjected to the petition and dispositions of the company's property (including payments to the various creditors) would need to be validated by Court order.   The risk of reputational damage following advertisement is also very high.

3. So what will actually stop a winding up order being made?

A tenant could make representations at the hearing of the winding up petition, but as mentioned above, this may be too late, as the petition will have been advertised and much of the damage will have been done.

It is much more likely that tenants threatened with winding up petitions will seek injunctions to restrain the presentation of the petition in the first place.

An injunction to stop a petition being presented can be made on the grounds of an abuse of process and tenants will likely rely on the existence of this new guidance note as evidence of the same.

4. But what does "inability to pay [as] the result of COVID-19" mean?

There is no guidance.

It may mean that a tenant should adduce evidence confirming that it has ceased to trade entirely by order of the Government, or perhaps that its revenues have been significantly impacted by the virus. We do not know whether the debtor company will be required to produce evidence of solvency prior to the Covid-19, or the extent to which the petitioner will be given an opportunity to test that evidence. In any event, a test of a point of insolvency could in itself lead to a complicated hearing over a number of days with potentially expert and witness evidence being adduced. The listing of such a hearing may well take us beyond the timeframe for the foreshadowed temporary legislation. The process of winding up and the listing procedures have not been designed to accommodate lengthy hearings on complicated issues.

5. Who will actually benefit from these new rules?

Once again, it is unclear.  The commentary seems very focussed on the retail sector, but there is nothing to suggest that it will not also apply to leisure operators, or indeed any commercial tenant, including office users.

It is also not clear whether this would benefit a landlord who is also a tenant – that must pay rent to its own superior landlord.

Much greater detail is needed.

6. What is the Government's motivation with this announcement?

These new measures, taken together with the restrictions on forfeiture and other landlord enforcement action, suggests that the Government is trying to do all it can to shield businesses from enforcement action by landlords during the worst of the pandemic.

The effect of the statutory changes may well be that the Courts are forced to change their own recently introduced procedures, which were designed to ensure that winding up petitions continued to be heard (albeit remotely) during the pandemic. It may now be the case that the Courts adjourn all or most winding up petitions until after 30 June, being the time limit that will, supposedly, apply to the new legislation.

7. What is likely to happen?

Unless the actual legislation, which will inevitably be produced in a rush, is incredibly detailed and unambiguous, or unless the Courts take independent action to limit the hearing winding up petitions, there is a real risk of satellite litigation centred round tenants taking action to prevent winding up petitions from being presented.

The problem may then arise that this legislation gives creditors an excuse to interrogate the solvency of tenants, dragging sensitive commercial information into the public eye for scrutiny by the Court.

This is probably not what the Government wants, so it is hoped that much needed clarity will be provided promptly.

As always, please do get in touch if you wish to discuss any concerns you may have around any of these issues.

End

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