Insider featured this article online on 25 March 2022.
Signs are emerging that the removal of relaxed rent payment rules introduced to counter disruption caused by coronavirus could prove the tipping point to insolvency for some companies in Scotland.
A senior litigation lawyer and a business recovery specialist are among those forecasting an increase in firms being wound up because they are struggling with commercial property arrears, on top of other pressures and general rising costs.
But they have countered that with a message that tenants already anticipating problems can increase their chances of survival if they are proactive and try to reach an agreement with their landlord over terms ahead of them missing payments.
John Bett, Head of our Dispute Resolution and Litigation, and Steven Wright, Director at Glasgow-based William Duncan Business Recovery, say some businesses are already taking steps to prepare for problems they may face within a matter of weeks.
Expectations of increased insolvencies are mounting, with temporary rules regarding commercial rents imposed by the Scottish Government at the height of the Covid-19 pandemic set to end.
This means that instead of landlords being required to give tenants a legal minimum of 14 weeks to pay outstanding rent, the period will revert to the pre-pandemic 14 days, with effect from March 30.
John said: “Tenants should, of course, pay their rent on the date it is due. But there are very real concerns that the return to the 14-day irritancy will leave businesses which have been struggling to pay debts of all kinds much more exposed. That, in turn, has a knock-on effect for the businesses of the landlords owed monies.
“The unfortunate reality is that this could very well mean the end of some companies because they simply cannot meet the competing demands of paying employees, creditors and their landlords.
“We have already had tentative enquiries from a legal perspective from tenants and landlords anticipating issues and exploring the best ways to manage those.”
The extended payment terms were among the measures introduced by politicians to give firms greater chances to weather the problems they face as a result of coronavirus.
John added: “Psychologically - and practically - March 30 will be a watershed for tenants and landlords in both how payments are managed and the steps which are taken in order to secure monies owed. Landlords with tenants who are struggling or unable to pay will want to assess the options available to them for their property.
“Ultimately, tenants and landlords both want their businesses to perform strongly. One wants to stay in the property, the other needs an income from that and for payment to be prompt.
“As has been the case throughout the pandemic, we would encourage anyone expecting problems not to ignore them, but start a conversation that could lead to an amicable agreement over payment terms being reached.”
The expiry of the enhanced pre-irritancy protections come at the same time as all businesses face increased costs as a result of rising energy and fuel prices.
Steven Wright agrees issues may lie ahead as the impact of the changes - and other factors - take effect. He said: “Over the coming months, we expect HMRC to start to increase pressure on businesses which are not engaging over pre and post-pandemic debts, along with repayment of bounceback loans becoming due.
“Coupled with changes on the landlord recovery side, this will ultimately create a bottleneck of debt for businesses.
“Many good businesses can get ahead of the curve by addressing this now and speaking to a professional about cashflows and restructuring.”
Companies operating cross-border are also being reminded that England’s equitable arbitration process does not operate in Scotland, meaning those with interests on both sides of the border - such as retail chains - will see differing dynamics in meeting their legal obligations.
While some commercial property tenancy agreements may have longer notice periods written into them - and would be applicable should steps be taken to end a lease - the minimum period to serve a termination notice is 14 days from the date payment was due.
Careful legal procedures must be followed in serving pre-irritancy notices.
