On 16 June 2021 the Government announced its intention to extend a number of the temporary restrictions introduced as a result of the pandemic: the restriction on rent-related forfeiture of business tenancies and commercial rent arrears recovery action (CRAR) by nine months to 25 March 2022; restrictions of the use of statutory demands (against companies) and the presentation of winding up petitions by three months to 30 September 2021; and several other ‘temporary’ measures, brought into effect by the Corporate Insolvency and Governance Act 2020 (CIGA) to 30 September 2021. These announcements will come as a hammer blow to many commercial landlords and those owed monies generally by commercial entities, who had been patiently waiting for their ability to enforce and take action to be reinstated. Many have relied on recovering those increasing debts and had been counting the days until they could do so.
The Government made a further announcement on 16 June 2021, which will not only compound the landlord’s challenges, but is likely to cause greatest concern for commercial landlords once the implications are digested. It was announced that a new Act of Parliament will be introduced to ‘address’ the rent arrears of businesses forced to shut during the pandemic. The details of the plans were sparse, but the announcement states:
‘…legislation will be introduced in this session to ringfence outstanding unpaid rent that has built up when a business has had to remain closed during the pandemic. Landlords are expected to make allowances for the ringfenced rent arrears from these specific periods of closure due to the pandemic, and share the financial impact with their tenants.
The legislation will help tenants and landlords work together to come to an agreement on how to handle the money owed – this could be done by waiving some of the total amount or agreeing a longer-term repayment plan.
This agreement should be between the tenant and landlord and, if in some cases, an agreement cannot be made, the law will ensure a binding arbitration process will be put in place so that both parties can come to a formal agreement. This will be a legally binding agreement that both parties must adhere to.
In order to ensure landlords are protected, the Government is making clear that businesses who are able to pay rent, must do so. Tenants should start paying their rent as soon as restrictions change, and they are given the green light to open.’
So, by ‘address’, we mean forced reductions, compromises or write offs for landlords. There is currently avid speculation as to the form the legislation will take, but given that the ‘Australian approach’ (below) is referenced, what is clear, is that commercial landlords will not be able to enforce the debts that have amassed in full.
The ‘Australian approach’ referred to varied from territory to territory in Australia. If we take the state of Victoria as an example the relevant period was 29 March 2020 – 28 March 2021. It applied to eligible leases (retail leases, non-retail commercial leases and commercial licenses) and allowed eligible tenants to request rent relief from their landlord. Where the tenant supplied prescribed evidence of the impact of the pandemic upon its turnover, the landlord was forced to offer rent relief within 14 days, or another agreed time, which could be up to 100% of the rent payable and should be no less than 50% of the rent unless agreed otherwise. It was, as a minimum, required to be proportional with the decline in the tenant’s turnover associated with the premises. Any deferred rent was required to be amortised of the greater of the balance of the term of the lease or a period of no less than 24 months. The legislation also provided the Victoria Small Business Commission with the power to make binding rent relief orders under applicable circumstances.
Until now, it may have been reasonable for landlords to treat rent arrears as a fully recoverable debt, even if in the short-term recovery was unlikely. As such, the level of receivables on the balance sheet for most landlords has grown, with the net-asset position unlikely to have increased in many cases, and liabilities having inevitably risen. No doubt the treatment of such debts has been discussed by boards with company accountants already. If legislation, such as that in Victoria was implemented in England and Wales, then landlords would need to carefully assess their solvency position. If a mandatory scheme is introduced which would crystallise and reduce the maximum amount which can be recovered, a landlord must reassess its solvency, adjust the company’s books and records accordingly and form a plan sooner rather than later.
The Insolvency Act 1986 provides the definition of when a company is deemed unable to pay its debts. Section 123(2) - 'A company is…deemed unable to pay its debts if it is proven to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities'. This is most often referred to as the ‘balance sheet’ test. A business which is currently cash flow solvent, but reliant on its debt book to evidence balance sheet solvency, will need to consider carefully, with professional advisors, how to treat those debts correctly if legislation is enacted which is similar to that in place in Victoria. If pushed through quickly, as CIGA was, the Government may unwittingly enact legislation which could push landlords and other creditors to the wall. There is, of course, always a balance to be struck for policy makers, but for commercial landlords, this may prove to be a burden which is too great to bear.
Working with lawyers, accountants and insolvency practitioners throughout this challenging period will be critical for businesses so as to establish (and document) that they are in a solvent position or, where that is no longer the case, obtain advice early to ensure that the interests of creditors are protected and directors’ duties are fulfilled. The earlier advice is sought, the more options are available.
We have written about the duties of directors of companies that are in the so called ‘twilight zone’, where the ability to trade and solvency are in question, and advise extensively on this area. A link to our article can be found here.