The latest insight from Corporate Restructuring Partner, Dominic Dumville, at Mercer & Hole into what the government’s moratorium extension means for tenants and the dangers of exploitation of this interim period.
There was a sigh of relief in boardrooms across the country following the recent government announcement extending the moratorium on landlords’ enforcement powers. Amongst those most relieved were directors of retail, leisure and hospitality companies as these sectors are amongst those most impacted by a lag in the recovery as the final restrictions remain in place.
Of course, the moratorium is only delaying a problem, which will need to be remedied further down the line. With landlords’ hands tied until March 2022, there is the possibility of a standoff in the interim if a director doesn’t see the need to raise the issue, to enter negotiations and reach mutually acceptable position whilst contractually due rent is going unpaid. However, this is a dangerous strategy which could have unseen ramifications for the business, the company, and the directors themselves, down the line.
Why delay when there is an acceptable solution to be reached?
When two willing parties enter a negotiation, both wanting the same thing (to be in business in 12 months), there is almost always an acceptable solution to be reached. From my experience this past year, deals being done with landlords include a mix of payment holidays, catch up instalments, rent free periods and lease amendments. Where the size and complexity of the problem is greater, more creative solutions are being explored. These include landlords taking repayment calculated as a percentage share of profits going forwards or debt being converted into equity holding, which can be bought back at a later year under call and put options.
Tenants shouldn’t take advantage of measures to protect their interests
Any directors, emboldened by tenant protections under the moratorium, looking to play hard ball with their landlord would be wise to think again; at some point the relationship will return to normal and the landlord will have their usual legal rights in relation to arrears. Damaging one of the company’s most important relationships for short-term gain, might lead to unnecessary conflict later.
Directors also need to keep in mind their statutory duties as set out in the Companies Act. Few would argue against the suggestion that it is good ethics for directors to trade transparently with unpaid creditors such as landlords in these times. However, I’d go further to suggest that where cash flow is tight, directors have a duty to reach and document agreements with unpaid creditors. Within the first COVID-19 intervention legislation, alongside furlough and the amendments to winding-up provisions – was a suspension of wrongful trading. However, this suspension expires on 30 June 2021, and has not been extended making directors potentially personally liable again for increases in a deficiency. Should the company, subsequently, run out of road and end up in an insolvency process, these are the kind of matters the liquidator is duty bound to investigate.
Being proactive, looking to solve problems and trading ethically has the added benefit of securing a sure financial footing for the company. More drastic and wide-reaching insolvency act solutions such as Creditors Voluntary Arrangement (CVA) and Administration, both of which have potential to achieve a far better outcome than liquidation, cannot be implemented overnight. It is always the case that the longer a director of a distressed business leaves reaching out to stakeholders or taking advice, the fewer options will be available to them and the less likely a rescue becomes.
In summary, where the leisure, hospitality and retail sectors struggling with rent bills have been let off again, they cannot delay addressing the struggle to come. There are solutions out there. Essentially, most business people in the UK want the same thing: to be trading and making profits when the pandemic becomes a crisis of the past, rather than our daily agenda.
If you have been affected by the issues raised above, please do not hesitate to contact Dominic at Mercer & Hole for further help and advice.