Will it ever end... latest update on COVID-19 restrictions for UK landlords

Today (16 June 2021) the UK government announced a further extension of some (but not all) of the temporary measures first introduced by the Corporate Governance and Insolvency Act 2020 (CIGA) in June last year.

The two most significant temporary measures for companies facing financial difficulties as a result of the COVID-19 pandemic were:

1. a suspension of personal liability for wrongful trading initially until 30 September 2020 (then variously extended, with a short break, to 30 June 2021); and
2. a temporary prohibition on creditors from filing statutory demands and winding up petitions for COVID-19-related debts also initially until 30 September (and extended to 30 June 2021).

Alongside these insolvency measures, CIGA introduced certain real estate-focussed measures, including restrictions for landlords from forfeiting commercial leases – again for a period to initially 30 September 2020.

Today the UK government announced that the restrictions on forfeiture of commercial leases will be extended to 25 March 2022 (for all businesses – not sector specific). Restrictions on filing a statutory demand and winding-up petition for COVID-19-related debts are extended by three months, to 30 September 2021.

The announcement does not mention the suspension of personal liability for wrongful trading – implying that this has not been extended. Readers may be reminded that this happened before (when in the autumn the first extension of the temporary measures did not include the wrongful trading liability). All indications this time however point to the fact that this was not an oversight and accordingly will not be remedied in the coming days.

Following the UK government’s announcement on 14 June that the last COVID-19-related lockdown measures will continue in force for another month to 19 July 2021, today’s announcement is not surprising. It also chimes with the extension of the furlough scheme (albeit on different terms) to 30 September 2021.

While the UK government remains concerned about the so-called ‘cliff-edge’ – an upsurge in insolvencies as a result of support being withdrawn too quickly – an extension does not of course remedy this problem but simply pushes the problem out.

The government has previously announced its intention to support commercial tenants and landlords in coming to bilateral arrangements on arrears and has published best practice in support of these negotiations. Following a ‘call for evidence’ in March, the government has now stated that it intends to introduce legislation in this Parliamentary session to assist tenants and landlords to work together to come to an agreement on how to handle rent arrears – this could be done by waiving some of the total amount or agreeing a longer-term repayment plan. If agreement can’t be reached, the new legislation will introduce a legally binding arbitration process delivered by private arbitrators. (These will have to go through an approval process to prove their impartiality.)

The new legislation (including the arbitral backstop) will only apply to those businesses impacted by closures. This means that rent that was accumulated either before March 2020 and/or after the date when the relevant business was legally allowed to trade will be actionable by landlords as soon as the restriction on winding-up/statutory demands (and the restriction on forfeiture) is lifted. Currently, this means that such debt could form the subject of a winding-up petition from 1 October 2021 and/or that forfeiture could take place from 26 March 2022.

We are currently seeing a few larger tenants attempting to restructure their lease liabilities (and accrued rent), with Virgin Active having successfully implemented a restructuring plan and car-park chain NCP having launched a restructuring plan to deal with its lease obligations.

The question will be whether this latest extension and the introduction of new legislation with arbitral backstop will put the brakes on further formal restructuring actions (by way of company voluntary arrangement or restructuring plan) or whether Virgin Active and NCP have started a wave that will continue over the summer. With competing offers being made on NCP and the extension, maybe more tenants will wait to see how the NCP restructuring plan goes before deciding. Ultimately the question will be a  'when' rather than 'if' there is an increase in the use of such processes.