Adam Pike discusses the impact the coronavirus pandemic is having on landlord insolvency. The coronavirus story is constantly changing. Although the government-imposed lockdown caused widespread shock to begin with, attention has now shifted to the support offered to help protect the UK economy during these challenging times.
For landlords and their tenants, the most high-profile measure introduced by the government was contained in the Coronavirus Act 2020, which came into force on 26 March.
In a bid to deal with the issue of commercial rent arrears, the Act introduced a moratorium on forfeiture of commercial leases due to non-payment of rent. Although this measure was originally put in place until 30 June there is strong evidence to suggest this deadline will be extended.
It’s a move that has been widely praised by commercial tenants, as they now have the breathing space needed to take stock and digest the change in circumstances.
However, there are still some concerns that the measures don’t offer enough protection to tenants impacted by the crisis, as rent is still payable, and landlords are entitled to use other enforcement measures to recover payments.
In the rush to protect tenants, landlords have been placed in an equally difficult position. For many, a large part of their rental income has vanished in the space of a month, and measures like the Coronavirus Act 2020 have limited their remedies.
Commercial landlords, at time of writing, have not been granted the kind of loan repayment holiday offered to other sectors of the business world. There is a significant chance that large numbers of landlords could face insolvency in the next few months and beyond.
With this in mind, the questions to consider are what insolvency means for the landlord, and what it means for any of their tenants, who thus far have managed to keep their business operating.
The effect of landlord insolvency
To begin with, most land landlords will probably opt for a Creditor’s Voluntary Arrangement (CVA) rather than full scale liquidation. This will take the form of an agreement between the landlord and creditors and can be entered into as long as 75% of those creditors agree.
Any tenant of a landlord taking this course of action will not be involved in the process itself and will only discover it has happened after the event.
The impact a landlord CVA might have on a tenant is difficult to predict, but under the supervision of an insolvency practitioner, it is likely that the attitude of the landlord toward their tenant will harden somewhat in respect to lease obligations being met in full and on time.
As such, the kind of flexibility needed for the negotiations between a landlord and tenant in the current climate are likely to be absent once a CVA is in place.
If a landlord goes down the route of administration, the impact on a landlord and tenant is likely to be reduced. As the administration will be attempting to rescue the landlord company, the administrator will work closely with existing management, which should ensure that existing lines of communication continue to operate as before.
Administration will usually cover the whole of the landlord’s business and all properties let. There are more complex circumstances which can arise from a landlord holding a mix of profitable and unprofitable properties. Loss making properties risk pulling the otherwise profitable business into insolvency, a fact which is intensified in the current COVID-19 crisis.
The solution is often pre-pack administration, which sees the profitable element of the business sold off to form a new company, and the loss-making aspects becoming part of a CVA.
A tenant of the profit-making element of the business will take the new company as their landlord, which will often involve working with the management and admin team of the original company.
Communication is key
Regardless of how the current situation plays out, it’s in the interests of both tenants and landlords to keep lines of communication open and take steps to reaching an outcome that is mutually beneficial.
The crisis we currently face is challenging enough as it is, so there is nothing to be gained from making matters more difficult than they need to be, and potentially forcing landlords or tenants out of business rather than coming through the storm unscathed.
If you have any concerns relating to insolvency, or a landlord and tenant dispute, it’s important to consult an experienced lawyers who can help you achieve the best possible outcome.
• Adam Pike is a Senior Associate Solicitor and member of the Ansons dispute resolution team. For more go to https://www.ansonssolicitors.com