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4th May, 2022

Commercial Landlords v Commercial Tenants

Handholdingkeystohouse CovidandRentArrears–WhatdoesitmeanforCommercialLandlordsandTenants

In light of the ongoing challenges for commercial landlords where their tenants are failing to pay, this article looks at the landlord’s position when tenants enter a Company Voluntary Arrangement (CVA) and the introduction of a statutory arbitration process for commercial rent arrears.

What is a CVA?
A CVA is a company voluntary arrangement, a statutory procedure that allows a company in financial difficulties to come to an agreement with its creditors in compromise of its debts.

A CVA proposal will be implemented if 75% of votes cast by the company’s creditors are in favour, unless it is opposed by more than 50% of creditors who are unconnected with the company.

The landlord should be notified of the CVA and is entitled to vote and to that end the tenant will usually notify the landlord of the CVA proposal. However, it should be noted that even if the landlord does not receive notice of the CVA or votes against it, if the CVA is approved, it will be binding on the landlord.

Why are CVAs relevant to landlords?
The use of CVAs for companies with a large property portfolio has increased in recent years. A CVA offers a mechanism that allows a company, with the consent of its creditors, to restructure its rent obligations thereby improving the company’s cash flow. CVA proposals do not always provide the most commercially attractive outcome for landlords. Therefore, landlords often find CVAs undesirable.

Can a landlord challenge the approval of a CVA?
It is possible for a landlord to challenge a CVA on the grounds that there has been unfair prejudice or material irregularity. For instance, if the landlord can show that they would achieve a better outcome if the tenant went into a formal insolvency process (administration or liquidation), it may be possible for the landlord to challenge the CVA.

However, a landlord must act quickly if they wish to challenge a CVA; an application must be made within 28 days of the CVA approval being reported to the Court.

The New Look Case (Lazari Properties 2 Ltd v New Look Retailers Ltd [2021] EWHC 1209 (Ch))
In 2021 we saw several challenges brought by landlords concerning tenants’ CVAs. In the New Look case, the landlords challenged the CVA on the grounds of unfair prejudice, material irregularity and general challenges as to the jurisdiction of the CVA, all of which were rejected by the High Court.

The landlords appealed the High Court’s decision, which was set to be heard by the Court of Appeal (CoA) on 1 and 2 March 2022. The appeal was highly anticipated since the outcome would have influenced the continued use of CVAs as a restructuring tool. However, the matter was settled on the evening before the hearing.

It is, to some extent, disappointing that the CoA did not get an opportunity to reconsider the challenges put forward by New Look’s landlords. Though, suffice to say, if the CoA upheld the High Court’s decision it would have made it exceedingly difficult for landlords to threaten the prospect of a challenge to negotiate a better arrangement.

Commercial Rent (Coronavirus) Bill 2021-22
With the expiry of current protections fast approaching, the Commercial Rent (Coronavirus) Bill 2021-22 (the Bill) has now been introduced (passed on 24 March 2022). The Bill introduces a legally binding arbitration procedure where disputes regarding commercial rent arrears accrued during the COVID-19 pandemic (known as a “protected rent debt”) cannot be resolved.

What is a protected rent debt?
A protected rent debt is where the tenancy was adversely affected by coronavirus and the rent due is attributable to a period of occupation between 21 March 2020 and 18 July 2021 (in England) and 7 August 2021 (in Wales) (known as the “protected period”).

What awards can the arbitrator grant?
The arbitrator will consider whether the tenant is entitled to receive relief from payment and will either award, or deny, such relief.

Under the Bill, relief from payment in relation to protected rent debts can include:
• writing off the whole or part of the debt;
• giving additional time to pay the debt or allowing the debt to be paid in instalments – payment must be within 24 months; and
• reducing or cancelling the interest owed in relation to the debt.

Does the Bill impact existing landlord remedies for rent arrears?
The Bill introduces a six-month moratorium on the use of certain remedies and measures such as forfeiture, winding-up petitions, CRAR, and drawing on rent deposits. The moratorium period begins on the day that the Bill was enacted (24 March 2022) and ends either when the arbitration concludes, if the matter is referred to arbitration; or if the matter is not referred to arbitration, the last day of the 6-month period in which a matter could be referred to arbitration.

The Bill only prevents landlords from using these remedies on protected rent debts. Therefore, once the current restrictions regarding forfeiture, CRAR, and winding up petitions end, it is expected that landlords will be able to use their ordinary (pre-COVID) enforcement rights in relation to non-protected rent debts.

Does the Bill impact CVAs?
Under the new arbitration procedure, if a tenant has already compromised coronavirus arrears under a CVA the tenant cannot then apply for arbitration of those arrears. Equally, a tenant cannot propose a CVA for 12 months after a referral to the arbitration scheme has been made.

Please contact Mark Davies at Aaron & Partners Solicitors for further advice and assistance.



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