COMMERCIAL TENANCIES FACING INSOLVENCY PROCEEDINGS -WILL THE GOVERNMENT MEASURES FAIL TO PROTECT TENANTS FROM EVICTION DURING COVID-19 LOCKDOWN?

Following our blog posted on 27th March 2020, this morning’s Telegraph Business Section reveals that Landlords are this week ratcheting up the pressure on businesses to pay rent during the lockdown by issuing insolvency proceedings. Whilst the government introduced measures to restrict Landlords from evicting Tenants for non-payment of rent during lockdown, that does not prevent Landlords from issuing enforcement proceedings to recover unpaid rent via insolvency proceedings (Winding Up Petition – or in the case of individual Tenants, Bankruptcy proceedings).
Insolvency Proceedings are available to a creditor where there is an undisputed debt in excess of £5000. As set out in our previous blog, it is difficult for Tenants to resist Landlords’ claims for rent on the grounds of frustration of contract. Unless a Tenant can raise a dispute, a Winding-Up/Bankruptcy Order is a foregone conclusion. Of course, most leases provide that rent must be paid without deduction or set- off which may well head off any claim of dispute.
In the case of a company, once the Petition is served, the Petition can be advertised, and the bank will usually freeze the company’s account thereby paralysing the business altogether. Even if the Tenant does pay the rent against a Petition, any other creditor(s) owed in excess of £5000 can hijack the petition necessarily bringing the downfall of the company.

For any business anticipating solvency, the key is to act early. Companies facing Winding-Up Petitions can apply to the Court for a Validation Order pursuant to Section 127 Insolvency Act 1986 for the freeze on the bank account to be lifted to make certain payments in the ordinary course of business such as wages to employees and suppliers provided the company can provide evidence that the Petition can be resisted OR that the payment benefits creditors generally -evidence that the company is putting an arrangement in place to satisfy all creditors (CVA) may assist.

The first stage in insolvency proceedings is usually the issue of a Statutory Demand demanding payment within 21 days though in the case of a company, a creditor can proceed directly to a Winding-Up Petition.

Lawson & Co acts for both Landlords and Tenants of Business Tenancies. If you are a Landlord or a Tenant facing these types of issues, contact us for advice.

Disclaimer: This Update is not a definitive analysis – take legal advice before pursuing any course of action. Copyright reserved