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Throughout June, the Firm’s Re-structuring and Insolvency Team are reviewing the potential impact of the Corporate Insolvency and Governance Bill.  Introduced in the House of Commons on 20 May 2020, the Bill offers struggling businesses a formal breathing space to pursue a rescue plan.

In our article entitled The Corporate Insolvency and Governance Bill - Moratorium Process, we reviewed the process whereby Company Directors can apply for a moratorium to prevent creditors from taking legal action against the company for a set period of time. 

This moratorium is part of a package of significant legislative reforms set out in the Bill, intended to enhance the UK’s restructuring rescue culture.   

Originally consulted upon in 2018, the proposed measures have been fast-tracked to deal with the Covid-19 pandemic.  The Bill has reached the Reporting/Third Reading stage in the House of Lords.  We expect it will receive Royal Assent in July.      

The new moratorium affords viable businesses sufficient time to restructure or seek new investment free from creditor action. The moratorium provides 20 business days protection from certain creditor action.  It can be extended for a further 20 business days without any consent or longer, with consent of the pre-moratorium creditors or the court.

As with the administration moratorium, during the Corporate Insolvency moratorium period, no legal action can be taken against the company in question, without the court’s permission.  In the context of a commercial Lease, a Landlord will be prohibited from raising proceedings to terminate a Company’s lease whilst the moratorium is in place. In addition, a Landlord must also seek the permission of the court prior to raising or continuing legal proceedings, except employment tribunal proceedings or legal processes arising out of such proceedings or proceedings involving a claim between an employer and a worker. 

In our article entitled Tenant Breach – Options for Landlords during CoVid Lockdown we highlighted the effect of the Coronavirus (Scotland) Act 2020 on a Landlord’s ability to terminate a commercial lease in the event of a breach.   The Coronavirus (Scotland) Act 2020 offers additional protection for commercial tenants struggling to meet rent or other payments due under their Lease by extending the statutory 14 day pre-irritancy notice period to 14 weeks.  A Landlord must, therefore, give at least 14 weeks prior written notice before initiating court proceedings to terminate a commercial lease on grounds of non-payment of rent or other sums due.

Whilst this extended notice period does not apply in respect of non-monetary breach, the Corporate and Insolvency Bill does so, regardless of whether a tenant has committed a monetary or non-monetary breach, during the moratorium period a Landlord will be prevented from irritating the Lease without leave of court.    

Unfortunately, the impact of the Bill in respect of a company’s liability to pay rent during the moratorium period is unclear.  The moratorium provides a payment holiday for certain pre-moratorium debts, excluding, amongst others, ‘’rent in respect of the moratorium period’’.  It is hoped this phrase will be further clarified as the Bill passes through Parliament. 

Meantime, where rent falls payable in advance of and during the moratorium, it might be assumed this liability should be apportioned on a daily basis (as would rent due as an expense of an administration) meaning the company would only be obliged to pay rent for the period that the company is in a moratorium, rather than the whole rental period.  The Bill is not clear on this point.  If left unchanged, this could result in strategically timed moratoria (i.e. a day or two after quarterly rent payment dates) to help mitigate exposure to rent. This may not be what was intended.

Whilst the new provisions set out in the Bill will, temporarily, limit a Landlord’s ability to recover unpaid rent, other remedies such as drawing on rent deposits or enforcing parent company guarantees will remain viable.  Meanwhile, Landlords should continue monitoring portfolios carefully, especially with regards rent payments due on the last quarter day of 28 May 2020.  All other remedies for recovering arrears should be considered. 

Tenants, likewise, should be considering their options and the risks that non-payment of sums due may pose. Whilst protections already afforded to them have offered some ‘breathing space’ the liability to pay rent and interest remains.  Furthermore, if action is taken against them by Landlords they should expect to have to pay legal costs incurred by Landlords under their lease provisions.

Looking ahead, the Government has published a code of practice to help commercial Landlords and Tenants map out plans for economic recovery during the coronavirus pandemic.  Developed in close collaboration between government and leaders from the commercial property sector, the code is designed to provide clarity when discussing rental payments and to encourage best practice so that every part of the chain is supported.  The code is voluntary in nature and is relevant for all commercial leases held by businesses in any sector which have been impacted by the coronavirus pandemic.

It encourages Tenants to continue to pay rent if they are in a position to do so and acknowledges that Landlords should provide support to businesses if able to do so.  The code will apply across the UK and encourages parties to be transparent in their discussions, to act reasonably and responsibly whilst recognising the impact that coronavirus has had on businesses’ finances.

Further information on the Code of Practice can be found via the following link: - https://www.gov.uk/government/publications/code-of-practice-for-the-commercial-property-sector

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