The Corporate Insolvency and Governance Act 2020 and the commercial lease

Posted: 25/09/2020

Following yesterday’s announcement that a number of the temporary measures brought in by the Corporate Insolvency and Governance Act (CIGA) to ease pressures on companies most at risk of insolvency during the ongoing Covid-19 crisis are to be extended, we look here at some of the key questions arising under CIGA in the context of the commercial landlord and tenant relationship.

What impact does CIGA have on insolvency based enforcement options during the ongoing Covid-19 crisis?

CIGA put the Government’s commitment to prevent the use of statutory demands and winding-up petitions as a means of rent-collection during the ongoing Covid-19 crisis on a statutory footing. Specifically, CIGA now prevents the presentation of a winding-up petition during the period 27 April - 31 December 2020 on the basis of an unsatisfied statutory demand issued between 1 March – 31 December 2020 (inclusive).

Although a landlord need not technically issue a statutory demand for unpaid rent before presenting a winding-up petition, the provisions of CIGA will nonetheless preclude the presentation of a winding-up petition during the period 27 April – 31 December 2020 unless the landlord is able to demonstrate it has reasonable grounds for believing that: (a) coronavirus has not had a financial effect on the company, or (b) the facts by reference to which the relevant ground [for presenting the petition] applies would have arisen even if coronavirus had not had a financial effect on the company (see CIGA Schedule 10, part 2). The court itself will only issue a winding-up order if satisfied that the company would be deemed insolvent notwithstanding the impact of Covid-19.

The new moratorium

What is it?

CIGA has introduced a new standalone moratorium procedure for companies experiencing financial difficulty - allowing the company’s directors, together with a licensed insolvency practitioner ‘monitor’, to retain control of the company’s affairs while assessing the options available to save it as a going concern. Designed to be quick to engage, the initial moratorium period is for 20 business days but this can be extended by a further 20 business days without creditor consent - or up to one year with creditor consent. A number of the eligibility criteria for invoking the moratorium are also currently relaxed – making it easier for companies to invoke the same during the ongoing pandemic.

What enforcement options for unpaid rents are available to a landlord if a tenant company is subject to the new moratorium?

Upon entering the moratorium, a company obtains a so-called ‘payment holiday’ for all pre-moratorium debts, and creditor enforcement action in respect of the same is heavily restricted for the duration of the moratorium period.

From a commercial landlord’s perspective, therefore, if a tenant company is subject to the moratorium, it will not be possible to:

• present a winding-up petition (eg on the basis of unpaid arrears);
• exercise a right to forfeit without permission of the court;
• issue or continue proceedings or enforce any money judgments without permission of the court; or
• exercise Commercial Rent Arrears Recovery (CRAR) against the company’s goods without permission of the court.

What about drawing down on a rent deposit if the tenant is in the new moratorium?

Draw down on a rent deposit may still be available to a landlord if the agreement pursuant to which the deposit is held constitutes a “financial collateral arrangement” (within the meaning of Regulation 3 of the Financial Collateral Arrangements (No 2) Regulations 2003). The specific provisions of each deposit agreement should, however, be checked carefully in every case to ensure that draw down is permitted in the circumstances.

What about rent for the period of the moratorium?

Rent for the duration of the moratorium period will be payable by the tenant company as a “priority pre-moratorium debt” - making the position akin to the treatment of rent as an expense during an administration/liquidation scenario. Furthermore, to the extent that this rent is unpaid by the tenant company, it will get “super priority” in any subsequent insolvency or restructuring procedure.

Do the provisions in CIGA relating to contract termination in the context of contracts for the supply of goods and services apply to commercial leases?

CIGA inserts a new s.233B to the Insolvency Act 1986, to restrict a supplier’s ability to exercise contractual termination rights in contracts for the supply of goods or services in the event of the contractual counterparty entering a restructuring/insolvency process.

Most commercial leases include provision for the landlord to forfeit on the happening of a tenant insolvency event. While CIGA does not specifically state whether leases fall within the category of contracts “for the supply of goods or services”, it is considered that the restrictions on such termination clauses (known as ‘ipso facto’ clauses) are unlikely to apply in the context of a right to terminate by forfeiture in a commercial lease.

The position is yet to be clarified so legal advice should be taken in every case prior to taking any steps to forfeit upon the happening of a tenant insolvency event.

For further information please contact Kerra Jelbert or Donald Lambert.

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