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More protection announced for struggling commercial property tenants

Statutory Demands and Winding up petitions by Landlords

The government have already introduced provisions to allow commercial tenants to delay rental payments for three months up to the end of June 2020 and are obviously keen to extend the measures to prevent landlords from exercising the usual available rent arrears recovery procedures.

The latest Government guidance issued on 23rd April 2020, makes clear an intention to provide further protection for commercial property tenants who cannot pay their rent due to the Covid 19 restrictions. This is intended to protect vulnerable businesses on the High Street in particular, from aggressive landlords during the COVID-19 crisis and the government have therefore proposed certain restrictions on the ability of landlords to issue statutory demands and subsequent winding up petitions as a means of rent recovery. However much of the important detail of the proposed legislation is still awaited and is currently likely to raise more questions than answers.

What about winding up petitions?

The guidance suggests that it is still going to be lawful to issue a statutory demand but that any subsequent winding up petition will not be allowed if the tenant’s inability to pay rent is because of the Covid 19 restrictions. Whether or not the petition can be allowed, is to be reviewed by the Court to determine whether the company’s inability to pay is indeed as a result of COVID-19. It is not clear however when or how this review will take place.

Usually, a winding up petition is issued at the Court and then publicly advertised before any hearing takes place and it is not clear if the Court will check the petition when presented to the Court or whether it will take place at the actual hearing. There will need to be an opportunity for either party to make representations and if the tenant has to do this at the hearing, it may be too late as the petition would have been advertised and damage could already have been caused to its reputation.

What is considered an inability to pay as a result of COVID-19?

The guidance does not contain an explanation as to what would be considered as an “inability to pay as a result of COVID-19” but it is likely to require that the tenant provides evidence confirming they have ceased to trade entirely and /or that their revenues have been significantly impacted because of the virus and related restrictions.

The Government has optimistically called for landlords and tenants to work together during this time but many landlords have said their own income has fallen significantly already resulting in fears it will start to cause failures among landlord property owners. Landlords no doubt feel that tenants no longer have an incentive to pay their rent even if they have the available resources to do so and there is becoming very little that landlords can then do about it.

Landlords at risk of breaching their banking covenants

Many landlords have mortgage liabilities on their properties and a landlord which is no longer receiving the usual regular rent is very likely to be in breach of its loan covenants. The Government are encouraging banks and other lenders to be flexible and to assist without imposing financial penalties on landlords but only time will tell how cooperative the lenders will be – certainly the banks do not have a great track record of helping out borrowers in times of previous financial crisis.

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