UK: Softening the cliff-edge: what next for COVID-19 related debt recovery

Since COVID-19 restrictions on businesses were first imposed in March 2020, the UK Government has repeatedly extended their schemes to protect debtors from both insolvency and property enforcement action by their creditors. In April the Government launched a consultation on what should come next when those schemes are scheduled to expire on 30 June 2021. With so many UK businesses, especially in hospitality and leisure, facing that cliff-edge when their protection from enforcement by their creditors fall away, the consultation was an excellent opportunity for those businesses to explain their concerns to the UK Government and to influence what protections may be put in place to support businesses from 1 July 2021.

UK Government launches consultation on replacement protections for debtors from 1 July 2021

By Victoria Hobbs, Matthew Pack and Anna Mikhalkovich

The UK Government’s restrictions on legal remedies for debtors whose invoices have remained unpaid due to the COVID-19 pandemic are due to expire on 30 June 2021. Whilst the Government has extended the expiry date three times, it is widely expected that this will be the last time, leaving many businesses hardest hit by COVID-19 vulnerable to new enforcement action from their suppliers, landlords and service providers from 1 July 2021.

What protections come to an end on 30 June 2021?

While they have been most used by businesses in the retail and consumer sector (and especially hospitality and leisure), since March 2020, the UK Government’s moratoria have actually protected all businesses with debts attributable to, or which remain unpaid because of, COVID-19 and related restrictions.
The Government’s package of measures which will end on 30 June 2021 include:

  1. a moratorium on forfeiture of leases for commercial premises – forfeiture allows a landlord to re-enter and take possession of commercial premises where rent is unpaid;
  2. restrictions on landlords using Commercial Rent Arrears Recovery (known as CRAR), which is a simplified procedure for a landlord to enforce commercial rent payments; and
  3. a moratorium on a debtor’s non-payment of statutory demands being used to show that a debtor is unable to pay its debts and therefore at risk of being wound-up, provided that the debt concerned has arisen or remained unpaid due to COVID-19. Crucially, this applies to any debt, not just commercial rent arrears.

These and other measures have allowed many businesses vital 'breathing space', alongside other schemes such as furlough and business rates relief, and have been vital in avoiding insolvencies and (even greater) job losses, especially in hospitality and leisure. We have advised many of our clients on what might come next – or whether the Government will allow this safety net to disappear entirely.

What new solutions are proposed by the Government, and which will best protect businesses with large COVID-19 related debts?

On 6 April 2021, the Government launched a consultation and call for evidence/survey to gather industry and interested stakeholders’ views on what, if anything, should replace these measures from 1 July 2021.

The Consultation was partly a fact-finding exercise for the Government, and participants were asked to fill out a fairly comprehensive survey of what impact COVID-19 and related restrictions have had on their business and how removal of the protective measures will affect them from 1 July 2021.

The Consultation also put forward six options which the Government is considering to take the place of the current measures from 1 July 2021. Those options are:

  • Option 1: Allow business protection measures to expire on 30 June 2021.
  • Option 2: Forfeiture becomes available again from 1 July 2021, but CRAR and the protection from statutory demands and winding-up petitions remain for a period. Forfeiture often represents as big a risk to the landlord as to the tenant, as in the current climate high street landlords cannot guarantee securing a replacement tenant.
  • Option 3: Restrict the existing protections to particular businesses/ industries based on the impact of COVID-19 restrictions and keep those protections in force for a fixed further time period, which the Government suggests could be six months. The Consultation seeks views on which industries should benefit from this continued protection, but the Government indicates that it wants to help businesses such as those which “have experienced mandated government closure since March 2020 (e.g. restaurants forced to close their dine-in service)”.
  • Option 4: Encourage increased formal mediation between landlords and tenants. From a dispute lawyers’ perspective, we are cautious about mandatory mediation, This would mean entering into mediation facilitated by an appropriately qualified, neutral third party. That third party would have no decision-making power and would only be able to encourage the parties to settle, not to enforce any terms. which can rack-up costs for parties in dispute without a positive outcome at the end, as either party would likely be able to walk away from the mediation at any time, even if they are obliged to start the process.
  • Option 5: Implement non-binding adjudication between landlords and tenants. This would require an accredited adjudicator to propose a fair settlement based on evidence from both parties. A landlord would then only be able to start proceedings once an adjudicator’s decision has been made.
  • Option 6: Implement binding adjudication between landlords and tenants. Whilst there is not a lot of detail on how the Government proposes that this solution would work in practice, it may be that it has in mind something similar to Construction Act adjudication, which is mandatory for construction disputes in England and Wales. The idea is for an independent adjudicator, skilled in the relevant industry, to receive submissions from both parties and quickly reach a view on the merits of the dispute and make a decision in one party’s favour. That decision is meant to both be available quickly and at reasonable cost – though those costs can build quickly, in our experience – and the parties are bound by that decision, unless and until it is overturned by a court. For the party being pursued for debts which it is only failing to pay because of cashflow problems, binding adjudication is a significant risk, especially if the adjudicator is making a decision solely on the legal position and not taking into account commercial factors. Whether the Government would seek to blunt this risk by designing a more bespoke adjudication scheme, we have yet to see.
Our thoughts – what does this tell us about the Government’s strategy?

The fact that this Consultation has been launched is of course a positive step, and shows that the Government does not expect all businesses to be out of danger after the lifting of national restrictions fully by the planned date of 21 June 2021 (although it now seems that date may well be pushed back). The Government appears to recognise that many businesses hardest hit by the pandemic will continue to face significant cash flow challenges even once restrictions are lifted.

The fact that the Government is also considering making the protections from remedies more targeted depending on the debtor’s industry is a clear sign that the Government is recognising the extent of the debt mountain which has grown throughout supply chains and across practically every industry and sector during the pandemic. This could suggest that the Government is preparing to withdraw support on a set timetable whilst favouring particular industries for longer, in the same way as the general roadmap out of lockdown, and a natural expiry of any remaining measures could well be the expiry of furlough later in 2021.

One alternative route which the Government has not even hinted at exploring is a model adopted in Australia, where reduced rent payments are being imposed on defaulting tenants, so that the landlord and tenant share the pain. The UK Government has historically been reluctant to interfere in commercial parties’ contracts and reduce the rent arrears, and instead focussed on limiting the landlord’s remedies to enforce the debt. We therefore think this other route is unlikely to be taken up by the Government, as it would be a departure from its strategy to date, despite calls from several prominent retailers in the UK to explore this further.

Now that the consultation period has ended, those in the hospitality and leisure sector can only wait to hear what, if anything, the Government decides to do to soften the cliff-edge.

Victoria Hobbs is a Partner; Matthew Pack is a Senior Associate; and Anna Mikhalkovich is a Trainee Solicitor, all in the International Dispute Resolution Group at Bird & Bird LLP

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