Update: Since the date of publication of this briefing, the temporary restrictions on statutory demands and winding up petitions have been further extended to 30 June 2021, together with the bans on business evictions and landlords using CRAR. The suspension of wrongful trading liability has also been revived with effect from 26 November 2020 to 30 June 2021.
Last week, the government announced that it would be extending the ban on business evictions until the end of 2020 and further extending the amount of rent that must be outstanding before a landlord can use CRAR. These restrictions would otherwise have ended on 30 September.
Today, the government introduced secondary legislation to extend the related Covid temporary measures that restrict statutory demands and winding up orders for the same period to 31 December 2020, as well as extending certain other temporary measures applied to our restructuring and insolvency regime by the new Corporate Insolvency and Governance Act . For more details of these temporary measures see our briefing on the Corporate Insolvency and Governance Act 2020.
On the other hand, the suspension of liability for wrongful trading is not being extended. Notwithstanding this measure was originally intended to relieve directors of the risk of wrongful trading liability and the duty to file for insolvency, it has not really had a significant impact on companies' decision-making. Allowing this temporary measure to lapse on 30 September rather than extending it will not, in our view, have a significant impact on directors' ability to continue to trade their companies.
Taken as a package, then, extending these temporary measures will continue to protect corporate tenants, many of whom are still struggling to pay rent, but at the continued expense of landlords who have seen their revenues plummet. As a result, some landlords have had to negotiate with their lenders for waivers and deferrals. Others have even been forced into insolvency.
And the chain does not stop with landlords. There are a number of institutional investors in property companies, including pension funds, whose investments are adversely affected by the non-payment of rent by tenants. Ultimately this reduction will hit the pension investments of private individuals.
Given the negative impact on landlords, their investors and all our pension funds, why then, have these measures been extended? Was it nevertheless the right thing to do now?
When first introduced, the measures were intended to help tenants survive a temporary period of lock-down and avoid being forced, prematurely or unnecessarily, into insolvency. The recovery was expected to be V-shaped. Very few people are still talking about a V-shaped recovery. The consensus is settling around simply a very long one, with some sectors not predicted to return to pre-pandemic levels until as late as 2024. This week's announcements on hospitality sector curfews and working from home will only exacerbate the problem.
If these protective measures were not extended and landlord remedies were switched back on, tenants would not be able to cope. Some landlords might take aggressive steps to seek to recover both current rental payments and arrears, thereby tipping too many distressed tenants into insolvency and we would have the very result that the measures were originally designed to prevent.
It is not just the government who is hoping to avoid a tsunami of insolvencies. There is only so much capacity in the insolvency sector, and the insolvency and company courts. If the measures were lifted and companies tumbled into insolvency unchecked, the sector and the courts may well be overwhelmed.
However, these measures are blunt. They are one size fits all and apply not just to tenants but to every company, whether or not it is fighting an existential struggle against the Covid economic crisis or instead has benefitted from the opportunities that lock-down has presented and is trading well. Landlords are complaining that comparatively healthy tenants, who have been trading all along, are still not paying rent. Many are arguing that whilst a sectoral approach may be more difficult to devise, it would strike a fairer balance.
So measures that were initially vital to protect the economy in early lock-down may well soon have the opposite effect, causing a clog on the economy by protecting so-called 'zombie companies' from the harsh realities of the post-pandemic commercial life.
And whereas, by flattening the insolvency curve, the current extensions may be the correct decision for right now, looking forward a more sophisticated solution, which facilitates the survival and growth of the fittest and focuses on rescuable businesses, will very soon be needed.
As with the replacement of the furlough scheme by the more targeted "Job Support Scheme", UK corporates need to be weaned off these particular government protections. No sector or business has been immune to the current crisis, but the wider commercial real estate sector is bound to suffer a grave crisis in the months to come if a more balanced approach is not taken soon.
These are not easy choices.
