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Winding up petitions, an overview of ring-fencing of commercial rent arrears and the arbitration process

Winding up petitions

The temporary insolvency measures addressed under the Corporate Insolvency and Governance Act 2020 expired on 31 March 2022.

The significance of the Government’s recent announcement is that service of a Schedule 10 notice on a debtor 21 days before issuing a winding up petition is no longer required.

In addition, the minimum petition amount of £10,000 no longer applies and the position has reverted to the requirement for a debt of at least £750.

The relaxation of the coronavirus regulations, which were introduced as a result of the COVID-19 pandemic, is likely to lead to an increase in winding up petitions over the coming months.

There have been no restrictions on bankruptcy proceedings throughout the COVID-19 pandemic.

However, there remain other restrictions on winding up and bankruptcy petitions concerning ring-fenced arrears of commercial rent which have accrued as a result of mandatory closures or restrictions imposed by the coronavirus regulations and lockdowns, as set out in the Commercial Rent (Coronavirus) Act 2022, discussed below.

Overview – ring-fencing of commercial rent arrears

A new moratorium, which is a legal pause of enforcement, has been introduced on 24 March 2022 prohibiting enforcement measures by commercial landlords.

The Commercial Rent (Coronavirus) Act 2022 (“the Act”) provides a new mechanism to grant relief for business tenants and guarantors from payments relating to “protected rent debts” due under business tenancies.

A protected rent debt includes outstanding rent, service charge, insurance rent, interest on late payment and VAT. These ring-fenced arrears which have accrued as a result of mandatory closures or restrictions imposed by the coronavirus regulations and repeated lockdowns must have accrued within the “protected period”, being 21 March 2020 to 18 July 2021 in England. Any rent debts which accrued in England post 18 July 2021, regardless of the tenant’s business, will not be protected and are excluded from the new moratorium. In practice, businesses such as supermarkets and pharmacies, which were not subject to any closure order, will not benefit from this new moratorium, despite the earlier protection afforded by the moratorium imposed by the Coronavirus Act 2020.

The moratorium period is due to take effect for six months from 24 March 2022 to 23 September 2022 (unless extended by regulations) or until the conclusion of an arbitration process.

A summary of the restrictions imposed on a landlord of a business tenant during the moratorium period are as follows:

  1. Commercial landlords are unable to issue any new debt court proceedings for a protected rent debt. Any claims made on or after 10 November 2021 can be stayed;
  2. Commercial landlords are restricted from presenting winding up petitions solely in relation to a protected rent debt (albeit it is open to the landlord to present a winding up petition in relation to both a protected rent debt and an unprotected rent debt);
  3. Commercial landlords are prevented from presenting new bankruptcy petitions following a statutory demand relating to a protected rent debt which was served between 10 November 2021 and 23 March 2022 or 24 March 2022 and 23 September 2022. In addition, any bankruptcy order made between 10 November 2021 and 23 March 2022 will automatically be deemed void and the petition is likely to be dismissed;
  4. Commercial landlords are restricted from enforcing any money judgments obtained between 10 November 2021 and 23 March 2022;
  5. Commercial landlords are not allowed to draw down against tenancy deposits;
  6. Commercial landlords may not forfeit for non-payment of a protected rent debt;
  7. Commercial landlords may not exercise commercial rent arrears recovery (“CRAR”) for non-payment of a protected rent debt;
  8. Commercial landlords are prevented from allocating payments that prioritise the discharge of a protected rent debt over any unprotected debts.

Arbitration

The Act introduces a legally binding arbitration process to resolve any remaining disputes between a commercial landlord and tenant relating to a commercial protected debt which has been adversely affected by the COVID-19 pandemic.

In the event that the parties are unable to reach an agreement having followed the principles set out in the updated Code of Practice for commercial property relationships published on 7 April 2022, either party can refer the matter to arbitration within six months of the Act’s enactment (24 March 2022), unless it is extended by statute. An important factor to consider is that it is the applicant for arbitration who will be required to pay fees in advance of the arbitration, albeit it is open to the arbitrator to make an award for each party to be responsible for their own costs.

The Department for Business, Energy & Industrial Strategy is due to publish a list of approved arbitration bodies.

In our experience, the majority of commercial landlords and tenants have successfully reached a negotiated settlement with respect to any arrears accrued as a result of the COVID-19 pandemic.

For further information, please contact our insolvency solicitors.