It's time to negotiate with your landlord now that the protections from the pandemic are being removed, say Henry Page and Louis Byrne
Many hospitality businesses will, through no fault of their own, have accumulated significant debts during the pandemic. The temporary measures that have protected them from eviction and the threat of winding up petitions will shortly be removed.
With many pandemic-induced debts becoming due for payment at the same time as the industry is facing spiralling inflation and staff shortages, there may simply be insufficient cash to settle rent arrears.
On 26 March, the provisions of the Coronavirus Act 2020 preventing commercial landlords from evicting tenants and the use of Commercial Rent Arrears Recovery (CRAR) will expire. From 1 April landlords will also regain the ability to issue winding-up petitions against non-paying tenants. While proposals for the repayment of arrears should be sought and 21 days' notice given, in practice such a request is likely to be made concurrently with issuing a demand for payment.
However, there is some hope on the horizon in the form of the Commercial Rent (Coronavirus) Bill, which seeks to force arbitration where ‘protected rent debt' is to be pursued.
Protected rent debt includes rent (and interest) relating to the period 21 March 2020 to 18 July 2021 (in England) if the business was affected by pandemic restrictions. It cannot be used as the basis for a winding-up petition and must be settled through arbitration in the absence of a negotiated compromise.
The intention is clear. The government continues to want to preserve otherwise viable businesses while unwinding the existing blanket protections necessary during the pandemic. And it wants to do so in a way that targets pandemic debts for protection while restoring the rights of landlords.
It is also clear that in order to achieve a successful arbitration the tenant will need to demonstrate the affordability of any proposed compromise. They must genuinely offer what the business can afford, and not seek to gain an unfair advantage through the process.
Having sound financial information available will be a requirement of successfully achieving a compromise from the arbitration.
The arbitration scheme will only officially cover the protected rent debt; therefore, it may well be worth specifying what periods current rental payments are discharging so as to ensure rent after 18 July 2021 is being settled while arbitration for the protected period continues.
A similar approach may be taken with HMRC through a time to pay arrangement, as well as with other stakeholders (banks and the repayment of BBL/CBILS etc), where robust financial information should aid directors in reaching a repayment proposal which allows the business to survive.
- Don't bury your head in the sand.
- Prepare cashflow forecasts to demonstrate your ability to maintain any payment proposals.
- Minute/document decisions made, including why they support the ongoing viability
- of the business, and therefore are in the interests of creditors.
- Prepare for the blanket withdrawal of protections from landlord enforcement, but stay up to date with the progression of the bill.
- Open communication with your landlord and other stakeholders.
- Ensure that you maintain excellent financial information so that you can make informed decisions.
- Seek advice from your lawyer or an insolvency practitioner where you are concerned about the business' solvency or viability.
Continuing to trade where there is no reasonable prospect of avoiding insolvent liquidation or administration may lead to personal liability for the directors, as well as challenges to transactions prior to an insolvency.
While at times during the pandemic wrongful trading legislation was curtailed, that has long since ceased to be the case, and throughout the pandemic directors have retained their duties to creditors.
While potentially unpalatable, facing up to a problem is more likely to achieve a resolution than ignoring it, with early engagement is likely to leave directors with more options when it comes to negotiations and potential restructuring routes.
Henry Page is a partner and Louis Byrne a manager in the corporate restructuring team at accountants Mercer & Hole
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