the Government’s plan to deal with COVID period debt
On 15 June 2021, the Prime Minister announced an extension to the date for the easing of all remaining restrictions to 19 July 2021, described as a “terminus” date. Various temporary measures implemented by the Government since the start of the pandemic to protect businesses from eviction and winding up were due to expire on 30 June 2021s. In order to align ongoing restrictions with economic support for businesses, the Government has extended those temporary measures. More notably, and as discussed in this Article, the Government has announced proposals it intends to implement this parliamentary session to deal with rent liabilities that have accrued since the start of the pandemic. These rent liabilities are now at unprecedented levels and pose a serious threat to the recovery of many sectors of the economy. The Government’s proposals are a welcome development: they provide a further means, alongside other formal restructuring and insolvency tools, of addressing the debt-bubble and avoiding the tsunami of business failures and job losses that are feared once the moratorium comes to an end.
The extension of temporary measures
The temporary measures which have been extended are:
- An extension until 30 September 2021 of the blanket prohibition on winding up petitions based upon statutory demands and the restriction on winding up petitions based on a company’s inability to pay its debts (unless the creditor has reasonable grounds for believing that either COVID-19 has not had a financial effect on the company or that the circumstances forming the basis of the winding up petition would have occurred even if COVID-19 had not had a financial effect on the company) under Schedule 10 of the Corporate Insolvency and Governance Act 2020 (“CIGA”).1
- An extension of the moratorium preventing landlords from forfeiting commercial leases and evicting tenants for non-payment of rent as originally enacted under section 82 of the Coronavirus Act 2020 from 30 June 2021 until 25 March 2022.
- The restriction of the use of the Commercial Rent Arrears Recovery scheme (“CRAR”) under the Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020 until 25 March The total number of days’ outstanding rent required for CRAR will remain at 544 days.
Proposed legislation to deal with rent liabilities: the arbitration scheme
The effect of the extension of these temporary measures is that businesses will have a further nine months’ breathing space and protection from eviction. However, these suspension measures by themselves do not address the massive liabilities for rent that have accrued since March 2020. It is reported that by June 2021, British retailers and other commercial tenants have delayed payment of £6 billion in rent.2 This debt time-bomb poses a serious threat to many sectors of the economy. Once the moratorium ends and landlords are able to pursue businesses for unpaid rents and other debts, thousands of businesses are likely to fail with the attendant loss of jobs. This could not only affect the tenants, but the landlords who could find themselves with thousands of vacant properties with a consequent effect on rents. Many of the landlords and tenants will carry bank debt and CBILS and other loans. The potential for systemic problems if borrowing turned bad must be real.
In recognition of this impending crisis, the Government has announced that legislation will be introduced this parliamentary session to deal specifically with rent liabilities that have accrued since March 2020. The intention is to implement a form of binding arbitration between landlords and tenants. Whilst the detail has not yet been confirmed, the Government will legislate to ringfence outstanding unpaid rent which has built up during the period when a business has had to remain closed.
“…the result has been the creation of a commercial debt bubble to unprecedented levels. Many businesses have accumulated debt that they will be unable to finance through ordinary routes”
In the first instance, landlords and tenants will be expected to reach a consensual agreement in relation to the arrears – this may be an agreement by the landlord to waive some or all of the rent or agreeing a longer-term repayment plan. If agreement is not reached consensually, legislation will require the parties to engage in an arbitration process, which will result in formal binding agreement. The arbitration process will be delivered by arbitrators from the private sector who will be required to act in accordance with guidelines set out in the legislation. It is also intended that any person wanting to act as an arbitrator will need to go through an approval process to establish their impartiality.
The criteria for such an arbitration are as yet unknown. It cannot be a determination of existing rights, because those will be ascertainable from the lease, so perhaps it will be something like the criteria applicable to what will be a single creditor cram down without the involvement of other creditors. Questions of fairness and equity are likely to come into play, although this is likely to be approached from a different angle given that other creditors are unaffected. It may well take several months to consult on and implement the intended arbitration scheme, which may explain the length of the extended moratorium.
Whilst the extension to the existing temporary measures applies to all types of businesses, the new legislation will only apply to businesses impacted by closures (primarily, nightclubs and other hospitality businesses) and will only apply to rent accrued during the period of restrictions on trading. Rent debt accumulated before March 2020 and after trading restrictions are lifted in the relevant sector, will be actionable by landlords once the moratorium is lifted. In order to ensure
landlords are protected, the Government has made clear that businesses who are able to pay rent, must do so.
The Government’s intention is that the arbitration scheme will strike a balance between protecting landlords and helping businesses most in need so that they are able to open and keep trading, recognising that reaching compromises or arrangements in relation to commercial rent debts will be the key to enabling businesses to resume trading in the medium to long term. The extension of the temporary measures provides landlords and tenants with a period of time during which they can reach a consensual agreement before new legislation takes effect.
The rent moratorium has been one of a raft of measures implemented by the Government to support businesses during the pandemic.
However, the result has been the creation of a commercial debt bubble to unprecedented levels. Many businesses have accumulated debt that they will be unable to finance through ordinary routes. The proposed legislation is aimed at avoiding an avalanche of business failures and job losses.
Businesses will still have available to them the usual restructuring and insolvency tools, including the new measures brought in under CIGA, namely, the Moratorium and the Restructuring Plan. There have been important developments in Restructuring Plans and CVAs which have redefined the parameters of permissible restructuring of rent liabilities (most notably, the New Look CVA and Virgin Active Restructuring Plan). The ringfencing in law of the pandemic period of rent will also have the result that those liabilities will be put into a different class for the purposes of arrangements or plans.
The extension of the temporary measures may well delay the much-anticipated rush to use arrangements or plans to deal with rent liabilities, and the proposed arbitration scheme is likely to reduce the number of businesses that seek to restructure their liabilities using more formal restructuring tools, although as the Government’s announcement made clear, the ringfencing will only apply to businesses impacted by closures.
The arbitration scheme is also likely to be more financially accessible to SMEs than arrangements or plans and will provide an important alternative to that sector of the market.
Back to Businesses UK- R3's initiative
As we turn to the question of refinancing or restructuring the debt accumulated over the COVID period the question of how to get information to UK businesses about options available to them will come into sharp focus. Whilst larger businesses will be able to access professional restructuring and insolvency advice, as recent large cases have demonstrated, SMEs and small businesses are more likely to need help navigating the options and implementing them. It is not only large businesses that now carry debt accumulated since March 2020. The profession is addressing this issue. R3 has recently launched a ‘Back to Business’ resource (backtobusinessuk. com) aimed in particular at the SME and smaller business sector. It offers a comprehensive guide to dealing with financial distress through both informal and formal routes on a website that puts the key questions in simple terms. The message is that businesses must act early and seek advice.
That is the way to save livelihoods. A particularly important part of the initiative is that it guides businesses to local Insolvency Practitioners. As the guide makes clear, many (hopefully most) will offer a free first consultation. This initiative shows a desire among professionals in the restructuring and insolvency sector to offer accessible and affordable advice and provide support to those businesses which now need it, in a bid to help save livelihoods. It is a welcome initiative at a time of genuine need.
1 These provisions were considered in an article by Mark Phillips QC, William Willson and Clara Johnson and looked at in more detail by Hilary Stonefrost and Daniel Judd in the July 2020 “Special Edition” of the
2 https://ft.com/ content/3e617ad0-b5c9- 4288-846f-c81dca041262