Corporate Insolvency and Governance Act 2020: Implications on the landlord and tenant relationship

The Corporate Insolvency and Governance Act 2020 (the “Act”) came into force on 26 June 2020.

The Act brings with it sweeping changes to corporate governance and the insolvency law regime. It contains both permanent and temporary provisions, the latter to assist with the COVID-19 crisis.

In our article “June Quarter Date – Help!”, we discussed the temporary ban on statutory demands and winding-up petitions as we awaited the Act to come into force.  In this article we explore this further, highlighting two other significant changes in the insolvency law regime (the company moratorium and the new restructuring plan) and their effect on the landlord and tenant relationship.

Temporary ban on statutory demands for unpaid rent

Statutory demands served between 1 March 2020 and 30 September 2020 are void.  Landlords who have served such a demand, or who want to serve a statutory demand, will have to wait until after 30 September 2020 to serve a new statutory demand. 

Temporary ban on winding-up petitions where COVID-19 has had a worsening financial effect on a company

The Act limits the circumstances in which a winding-up petition can be presented by creditors. No winding up petitions can be presented on or after 27 April 2020 in respect of a statutory demand served between 1 March 2020 and 30 September 2020.  Landlords may, however, present a winding-up petition where they have reasonable grounds for believing that COVID-19 has not had a financial effect on the tenant company, or the tenant company would have been unable to pay its debts even if COVID-19 had not had a financial effect on the tenant company.  This is unlikely to be straightforward for either party, as evidence of the reasons for financial hardship may be difficult to obtain.

New “company moratorium” process

Companies that are insolvent, or are likely to become insolvent, can apply to the Court for a moratorium, if they can show, amongst other requirements, that a moratorium would result in the company being rescued as a going concern. Creditors are not able to take legal action against the company for a period of 20 business days from the moratorium coming into force and it may be extended without creditor consent for a further period of 20 business days. Further extensions are available, but are subject to either creditor or Court’s consent.

The moratorium provides a payment holiday in relation to pre-moratorium debts i.e. debts which have fallen due before the moratorium. There are exceptions to these including unpaid rent which fell due prior to the moratorium and goods or services supplied prior to the moratorium. In addition, as rent in respect of a period during the moratorium and goods or services supplied during the moratorium continue to be payable, tenants are still obliged to pay the annual rent and service charge under their leases in full.

The effect of the moratorium means that landlords are prevented from forfeiting a lease by peaceable re-entry of the property, enforcing security over the tenants’ property or starting or continuing legal proceedings against the tenant company.

New restructuring plan

Companies in financial difficulties are able to propose a restructuring plan to creditors and/or shareholders. This has similarities with the current scheme of arrangement procedure. The plan will require both creditor and Court approval, with the Court having the power to sanction the plan and bind or “cram-down” dissenting creditors (subject to certain conditions being met).

Landlords are a class of creditor.  Even if they, as a class, do not approve the plan, if the conditions are met and the Court approves it, landlords may have no choice but to accept the approved plan.

Breathing space

Landlords may not welcome the Act as much as tenants, as the provisions seek to protect debtors. However, in a time where both landlords and tenants are more then ever dependent on each other for survival, the hope is that this Act will provide tenants with breathing space to continue to trade and potentially avoid insolvency, which, in turn, should help all parties during this unprecedented crisis.

If you have any questions, please do get in touch with Amanda Gray or any member of our Real Estate Dispute team.

If you would like to know more about the mechanisms of the Act from a company’s point of view, please see our article here.