Property Litigation weekly update – 24 April 2020

As the lockdown continues, we present the fifth edition of weekly news with concise legal updates, followed by some positive stories. Let us know of any legal topics you would like to see covered and we remain on hand to advise on property-related legal issues. 

NEWSFLASH: New restrictions on statutory demands, winding-up petitions and CRAR

The Government has announced it will introduce legislation to protect high street shops and other companies from debt recovery mechanisms. Statutory demands and winding-up petitions will be voided where a company cannot pay their bills due to Coronavirus. Commercial Rent Arrears Recovery ("CRAR") will be prohibited unless a tenant owes at least 90 days of unpaid rent (excluding service charge and insurance rent).

The Government last month introduced a moratorium on forfeiture for non-payment of rent. Since then many tenants have failed to pay the March quarter's rent and some landlords have issued statutory demands requiring tenants to pay the debt within 21 days. Some landlords have been pursuing non-payment by issuing winding up petitions, a mechanism to put a company into liquidation. Tenants have lobbied hard for increased protection against such action and the Government has now decided to act.

We are yet to see the detail of the legislation. It is not clear, for instance, how the use of statutory demands will be restricted. Which tenants will the protection apply to and will there be a blanket prohibition on statutory demands being served or something more nuanced? For winding-up petitions, initial indication is that the law will prohibit petitions being presented, or winding-up orders made, where the company’s inability to pay is the result of COVID-19, as determined by the courts. The devil will be in the detail as to how this works in practice. Will the court scrutinise a tenant's accounts to determine the true impact of Covid-19 and any savings made due to other relief measures such as the business rates holiday and furloughing employees?

The proposed restrictions on CRAR, a statutory procedure which allows landlords to recover rent arrears by taking control of the tenant's goods and selling them, may be more straightforward. Across the board, landlords will be prohibited from using CRAR where any tenant owes less than 90 days of unpaid rent. This will prevent action unless a full quarter is outstanding, but depending on the drafting and the period for which it ends up remaining in force could potentially be gamed by tenants part paying a small proportion of the quarterly rent when it falls due.

The new measures will be included in the Corporate Insolvency and Governance Bill which will introduce a range of changes to the insolvency regime. It is not clear when the legislation will come into effect but it appears likely that it will have retrospective effect on current statutory demands and winding up petitions. The legislation will be in force until 30 June, but may be extended.

Update on dealing with squatters during the Coronavirus crisis

All possession proceedings brought under CPR Part 55 have been stayed by the introduction of a new Practice Direction 51Z. Following concern that this would also prevent action against squatters the Practice Direction has been amended. The stay no longer applies to possession proceedings against trespassers and these actions can now proceed as normal at Court.

Further details can be found here.

New interest in 'light touch' administration

A number of UK retailers and food and beverage chains are investigating 'light touch' administration as a means of surviving the Coronavirus crisis. Debenhams is the most recent high-street business to enter into such a process. The mechanism is 'light touch' because it allows company directors to file for administration but retain day-to-day management, rather than ceding control to administrators. Although there is new interest in this approach, it is not a new mechanism. A company enters administration as normal, and the ‘light touch’ element refers to Insolvency Practitioners devolving management powers back to the directors (Paragraph 64(1) of Schedule B1 of the Insolvency Act 1986).

In practice many administrators already involve directors in ongoing trading, however, there is concern that in the present crisis Insolvency Practitioners may end up handing too much power back to directors, particularly if they allow directors to enter into transactions on the IP's behalf.

Temporary Insolvency Practice Direction

A temporary Insolvency Practice Direction (IPD) has come into force and will remain in force until 1 October 2020. We have set out below some important aspects:

  • All insolvency hearings will now be conducted remotely, unless otherwise stated. The hearings will be conducted via Skype for Business or another technology which is agreed. The court will allocate time slots for winding-up and bankruptcy petitions with each time slot being designated with a meeting link. For our practical advice on remote hearings, please see our previous article here.
  • Under the IPD all applications, petitions and claim forms (except petitions for winding-up and bankruptcy to be heard before an ICC Judge) listed prior to 21 April 2020 are adjourned and will be re-listed. If an application is urgent parties may apply to the court for this to be heard as soon as possible.
  • Where a statutory declaration is required as part of the winding-up and bankruptcy petition, this can now be made in front of a person authorised to administer the oath by way of video call rather than in person.

Practice Direction 51ZA: Temporary (but limited) extensions of time in ongoing court proceedings and litigation

Temporary changes (which will run until 30 October 2020) have been introduced regarding deadlines for complying with directions during the ongoing pandemic:

  • Parties can now agree to extend procedural deadlines by up to 56 days, without the need for court permission, providing the extension does not impact on any listed hearing date. If faced with logistical difficulties (for example, speaking to witnesses and the availability of experts) parties can agree longer extensions of some dates without needing to apply to court.
  •  Where court permission is required for extensions of more than 56 days, the court will now take into account the impact of the Covid-19 pandemic. However, this must still be compatible with the proper administration of justice. An application should therefore evidence why the need for an extension outweighs the objective of the courts to ensure cases are dealt with expeditiously. It should be noted that hearings are going ahead by telephone and video link. Therefore, whilst there is some flexibility, those currently involved in litigation should not assume that logistical difficulties posed by Coronavirus will mean court deadlines can easily be extended in all situations.

Practical Points to Consider

Likely extension of a 'reasonable period' for tenant repairs

A tenant's repairing obligations remain unchanged by Covid-19, although getting any repair work completed may prove problematic for obvious reasons. These challenges should be taken into account where a landlord has served a section 146 notice on a tenant requiring them to remedy a breach within a 'reasonable period'. Given Covid-19 and the Government imposed restrictions, it is likely that additional time should be allowed for the 'reasonable period' given to the tenant to remedy disrepair and any failure to do so may be deemed insufficient by the Court. For commercial leases with a term of at least 7 years, and at least 3 years unexpired, the Leasehold Properties (Repairs) Act 1938 will also apply.

Serving documents in the time of Covid-19

As the majority of people are now working remotely due to Covid-19, this is presenting new challenges when serving/receiving statutory demands, court proceedings, winding up petitions and other time-critical documents.

Registered offices should be closely monitored to ensure post is collected and reviewed so that documents and deadlines, such as a payment deadline in a statutory demand, are not missed. Alternatively, safeguards such as setting up a mail re-direction service may assist or giving specific parties notice of a temporary alternative address to ensure time critical documents are received.

For notices served pursuant to a lease, the case of Blunden v Frogmore Inv. Ltd [2002] confirms that valid service can be effected by a landlord, under the deeming provisions in section 23 of the Landlord & Tenant Act 1927, even if the tenant is known not to be at the property.

If you would like any assistance or have any queries on serving notices please do not hesitate to contact the team.

Rent review provisions

It is likely that Covid-19 will negatively impact on the property market, potentially resulting in rental levels decreasing. We anticipate that landlords will push for the inclusion of rent review provisions in renewal leases, where these did not exist in previous leases, and/or more frequent reviews to provide an opportunity to increase rents later on where they have been agreed at a lower level due to Covid-19. In the absence of agreement between the parties, in a renewal lease the inclusion, and frequency, of rent review provisions fall to be determined by the court under section 34 of the Landlord and Tenant Act 1954. It is worth remembering that any departure from the current lease terms will require justification and expert evidence will therefore be key.

Trowers Needs You!

Pandemics have historically fundamentally changed the way that people view and go about their daily lives. At Trowers we are talking to our clients and contacts across a variety of sectors to gather thoughts on what future business practices might look like, once the current pandemic is over. Once we have this information, we will issue a report summarising the key findings. If you would be interested in contributing to this on a no-names basis, please email our co-ordinator, Dan Fletcher and he will arrange a time for us to contact you to discuss. The more input we receive, the more interesting the output will be, so please do get in touch.

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