A final extension on Covid business protection law?

Phil Farrelly

On the 22 June 2021 the Government extended, perhaps for the last time, the Coronavirus Act 2020 restrictions on issuing winding up petitions until 30 September 2021 (which is also when the furlough scheme ends)  and landlord forfeiture/Commercial Rent Arrears Recovery until 25 March 2022.

It was assumed that other restrictions, such as the suspension of liability for wrongful trading, would also be extended but that was not the case and  that suspension ended on 30 June 2021. So from 1 July 2021 directors can be sued for wrongful trading in respect of trading after 30 June which increases the deficit to creditors.

What is to happen with rent arrears?

The Government also plans to legislate to “ring-fence” pandemic rent arrears. The legislation will apply to cases where businesses have been unable to pay their rent during the pandemic and have built up arrears. The focus is to encourage landlords to make allowances in respect of the ring-fenced arrears and share the financial impact. The Government press release specifically references landlords waiving some of the total amount of arrears or agreeing longer repayment terms. If landlords and tenants are unable to come to an agreement there will be a binding arbitration process to resolve the situation.

There is speculation as to the form the legislation will take, but given that an ‘Australian approach’ is referenced in the press release, it looks like commercial landlords will not be able to recover the arrears that have accrued in full.

The ‘Australian approach’ referred to varies from territory to territory in Australia. In the state of Victoria for example restrictions applied to eligible leases (retail leases, non-retail commercial leases and commercial licenses) and allowed eligible tenants to request rent relief from their landlord for rent arrears for the period 29 March 2020 – 28 March 2021 . Where the tenant supplied prescribed evidence of the impact of the pandemic upon its turnover, the landlord was forced to offer rent relief  of 50-100% of the arrears ( unless otherwise agreed) within 14 days, or another agreed time. The relief 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 over 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.

An introduction of the Australian approach could threaten the solvency of some landlords: until now, landlords may have treated rent arrears as fully recoverable debt (even if in the short-term recovery was unlikely) and showed them as debts receivable on their balance sheets. If legislation is implemented in England which reduces the amount recoverable, some landlords will have to reassess their balance sheets/solvency.

If there are no further extensions of restrictions/further support will there be a tidal wave of insolvencies?

We’ve seen the lowest levels of corporate insolvency since 1989 thanks to the major package of support that has been put in place for businesses i.e. VAT deferrals, the furlough scheme, cheap/flexible Government backed Coronavirus Business Interruption Loan Scheme (CBILS) and bounce back loans.

However, with all of these support measures now ended or coming to an end, we expect to see corporate insolvency rates rise significantly. Actual or threatened action from HMRC and/or landlords are among the major catalysts for directors to take corporate insolvency advice/instigate formal insolvency processes.

On 30 June 2021, HMRC published a policy paper announcing that it was resuming a pro-active approach to debt collection and when necessary will use enforcement to deal with those that ignore them. The paper specifically refers to HMRC’s intention to resume use of its enforcement powers – including the issue of winding up petitions from 30 September 2021.

They are contacting all customers with tax arrears with a view to reaching agreement over payment terms before using enforcement powers.

A recent report in the Financial Times also quoted British Land, one of the UKs largest commercial landlords which owns various retail sites including Meadowhall in Sheffield, as saying it will be halting rent concessions and  taking a firmer line on rental payment as its customers are now back and trading well.

The company wiped £1billion from the stated value of its holdings in May reflecting rent that was owed by tenants who were unable or unwilling to pay.

The return of these pressure points together with the end of the furlough scheme and other support measures will inevitably force some directors to make decisions which have been postponed for some time.

If this is impacting your business please contact us for a no obligation chat…

Contact

Phil Farrelly

t: 0161 827 4609

e: philip.farrelly@bermans.co.uk

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