Fact Sheet: So, you have a right to terminate a contract. Think again!

Many commercial contracts for the supply of goods and/ or services contain a mutual term whereby either party to the contract has the right to terminate it, if the other party commits an act of insolvency.

In respect of a company, that can include the other party going into liquidation, entering into a voluntary arrangement or administration, the appointment of a receiver or a moratorium comes into force in respect of a company (“an Act of Insolvency”).

However, due to Covid-19, the UK government introduced a ban on termination for insolvency in July 2020 – see s.233B of the Insolvency Act as inserted by the Corporate Insolvency and Governance Act 2020 s.14 (“the Legislation”) – even if a contract provides for it.

In short, that means your contractual right to terminate a contract for a company’s Act of Insolvency is now unlikely to be enforceable or only for a further short period of time.

Further, you are prohibited from making your on-going supply of goods and services after an Act of Insolvency has occurred conditional on payment of outstanding sums that fell due before the Act of Insolvency occurred.

The Legislation applies if a company entered into an Act of Insolvency after 26 June 2020. It applies to:

  • Companies;
  • Mutuals (including co-operatives and community benefit societies but not credit unions);
  • LLPs;
  • Other bodies and associations, whether or not incorporated.

It applies to suppliers that are:

  • Companies;
  • Mutuals (as above);
  • LLPs;
  • Other bodies and associations (as above);
  • Individuals carrying on a trade or business.

Exclusions apply to:

  • Financial services firms and contracts;
  • Public-private partnership project companies;
  • Utilities, communications and IT service providers that are already covered by sections 233 and 233A of the Insolvency Act 1996.

There is also a temporary exemption to the Legislation for small suppliers but that only lasts until 30 September 2020.

Section 15 of the Legislation provides that s.233B of the Insolvency Act does not apply to (small) suppliers where two or more of the following conditions applied at the time the company entered into an Act of Insolvency:

“Where the supplier is not in its first financial year at the relevant time, … in relation to its most recent financial year:

  • Condition 1: the supplier’s turnover was not more than £10.2 million;
  • Condition 2: the supplier’s balance sheet total was not more than £5.1 million;
  • Condition 3: the number of the supplier’s employees was not more than 50.”

(“the Small Supplier Exemption”)

There are further provisions for assessing the exemption eligibility for small suppliers that are in their first financial year.

So, if you have a right to terminate a contract with a company, you qualify as a small supplier and wish to terminate for an Act of Insolvency, you need to get on and do so by 30 September 2020 at the latest.

If you are not a “small” supplier but have a right to terminate a contract with a company due to an Act of Insolvency, and you still want to terminate it, how might you do so:

  • in a case where the company has become subject to a relevant insolvency procedure such as administration, receivership, liquidation or a provisional liquidator is appointed, obtain the office-holder’s consent to the termination of the contract;
  • in any other case, get the company to consent to the termination of the contract; or
  • check whether the Act of Insolvency has ended (eg when a moratorium ends or the appointment of an administrator ceases). If it has, the Legislation no longer applies; or
  • if after the Act of Insolvency, you supply goods and services which are not paid for on the usual contractual terms, you can terminate the contract;
  • by application to the Court and it is satisfied that the continuation of the contract would cause the supplier hardship and grants permission for the termination of the contract; or
  • this legislation does not apply to a company entering into a scheme of arrangement or the appointment of a fixed charge receiver (as opposed to an administrative receiver) over the company’s assets. So check if that is the position.

The Legislation is permanent and will continue to apply even after any threat of Covid-19 has passed, so this prohibition on termination clauses is here to stay. That being the case, how can new contracts include provisions to deal with the effects of the Legislation. Some suggestions are:

  • The supplier including a right to terminate for convenience on notice.
  • Guarantees or security for payments from others related to your company counterparty being obtained.
  • Reduced payment periods to highlight a company counterparty’s payment difficulties sooner rather than later.

HOW CAN CONEXUS LAW HELP?

Businesses and individuals will need legal advice to help them understand the risks they may face and the options that may be open to them.

We are available to assist in reviewing the laws in many jurisdictions across the world, and to review specific contracts. We are also available to provide practical, business-orientated advice on how to best protect yourself from the ongoing commercial effects of Covid-19.

Contact

For further advice on renegotiating your contractual obligations or pursing your contractual rights, please contact Ian Timlin.

T: +44 (0)20 7390 0280
M: : +44 (0)7767 427 332
E: ian@conexuslaw.com

Lawyer warns construction companies of the challenges of ‘virtual mediation’ as a result of Covid-19

Organisations that are looking to use mediation as a way to resolve a dispute without the need for costly litigation need to be aware of the impact that the Covid-19 pandemic will have on the process in the coming months, and the potential pitfalls and challenges.

This is according to Ian Timlin, a specialist dispute resolution and commercial litigation lawyer at Conexus Law, who cautions that the new process may not be as effective and is also less secure unless certain measures are put in place.

Ian explains: “From a practical point of view it has been relatively straightforward to bring mediation online with Zoom for example being used as the facility for secure separate breakout rooms for separate parties and for bringing the parties together in a plenary session. The mediator can then speak to each party separately or with the parties together, virtually switching online from room to room.

“However, this does mean that things are not necessarily as secure as in a physical situation. As a result, we are advising that there is an online mediation protocol in the mediation agreement to be signed by the parties which governs the terms of how the virtual mediation progresses and the rules that are to be adhered to. It should cover areas such as not recording the sessions or sharing of the mediation meeting ID other than to participants involved to ensure no one ‘sits in’ unannounced.

“Also each party should agree that if for any technical reason, including error on the mediator’s part in moving parties correctly to the breakout rooms, they can see and/ or hear a private conversation between the mediator and/ or any other party, they must terminate the session at once and call or text the mediator.”

However, Ian goes on to say that the biggest challenge remains the fact that it is much more difficult to establish a genuine rapport across a screen with the mediator and other parties and this is key in mediation to gain a parties’ trust and confidence.

“Before people are willing to settle, they must feel that their interests are truly understood, and only then can a mediator reframe problems and float creative solutions. Eye contact with the other side can be difficult if they are sitting well back from their screens and not in the same room and therefore it is vital that participants show their faces and do not hide behind their name on a black screen or stock photo of themselves. That way each party and the mediator can see how they are reacting to the points being made,” he explains.

Ian also points out that whilst online mediation is new to many organisations, Ebay is a big user and it is estimated that an incredible 50+ million disagreements amongst traders on eBay are resolved every year using online dispute resolution.

“There is no doubt that virtual mediation is here to stay and is certainly appropriate for low value disputes. However, where considerable sums are in dispute or complex issues arise, serious consideration should be given to the traditional form of mediation even in the current circumstances,” concludes Ian.

For more information, Ian has created a guidance sheet, Mediations in the time of Covid, alongside another fact sheet, Renegotiation – An art not a science.

Fact Sheet: Mediations in the time of Covid-19

In our factsheet Renegotiation – An art not a science, we touched upon resolving disputes using the process of mediation.

Mediation is:

  • Voluntary, private and non-binding negotiation until the parties distil any negotiation/ settlement to a new written settlement agreement.
  • It is most often the appointment of a qualified professional third party mediator (from a professional mediation body such as CEDR or Independent Mediators in the UK) who shuttles between the parties, undertaking confidential discussions with the parties, with a view to brokering a negotiation/ settlement between them.

In the past, mediation has usually been undertaken across, at least, three rooms at a neutral venue with the mediator shuttling between the opposing parties’ rooms having confidential decisions with each party to try to narrow the dispute and gap between them, and ultimately try to get them to reach a settlement.

At the start of such a mediation, there was usually a plenary session where the mediator sits at one end of the table and the parties and their lawyers speak to each other across it.

With Covid-19, mediation has now moved online and they are taking place by various platforms using live screen video. In particular, Zoom is being used as the facility for secure separate breakout rooms for separate parties and for bringing the parties together in a plenary session.

So how is it operating virtually? The mediator places each party and its lawyers into its own virtual room, even if representatives from party are at different locations. The mediator can then speak to each party separately or with the parties together. Instead of actual shuttle diplomacy between actual rooms, the mediator does the same virtually by switching online from room to room.

But what are the matters and potential pitfalls that need to considered for a virtual mediation:

Check that there is an online mediation protocol in the mediation agreement to be signed by the parties which governs the terms of how the virtual mediation progresses and the rules to be adhered to. It should contain at least the following:

  • The parties should agree that no recording of the mediation takes place (it’s a confidential process), no photo images are taken and that there is no sharing of the mediation meeting ID other than to participants at it.
  • If for any technical reason, including error on the mediator’s part in moving parties correctly to the breakout rooms, a participant finds itself able to see and/or hear a private conversation between the mediator and/or any other party, the participant should terminate the online mediation session at once and call or text the mediator on the number provided by it.
  • Steps to be taken if technology fails to operate properly or the mediation session does not start on time or is interrupted.

In the case of the cross border mediations, pre-mediation checks should be undertaken to ensure that no national firewalls prevent parties in one jurisdiction from using Zoom or the technology platform to be used for the mediation.

A pre-mediation call from the mediator to all participants from a party and the testing of the technology platform to be used by all representatives of party for the mediation is paramount. A good and secure internet connection and both the parties and the mediator understanding the technology/platform are very important to a successful mediation.

As to the virtual mediation itself, the following points should be borne in mind:

  • A headset with microphone or earphones with microphone is very helpful.
  • Mute microphones and don’t talk over people.
  • A professional background and decent lighting will assist the process. Representatives of a party should show their faces and not hid behind their name on a black screen or stock photo of themselves so that each party and the mediator can see how they are reacting to points being made.
  • An interruption free day is very important for participants. That is more easily achieved in an in-person mediation rather than representatives from a party being in different locations and often at their homes. The use of phones and checking emails on the computer that a party is using to participate in the virtual mediation should try to be avoided.
  • Across a screen, it is going to be more difficult to establish rapport. To gain a parties’ trust and confidence, rapport must be genuine. Before people are willing to settle, they must feel that their interests are truly understood. Only then can a mediator reframe problems and float creative solutions. Relationship building is more difficult online. Eye contact with the other side can be difficult if they are sitting well back from their screens and not in the same room.

Virtual mediation is still relatively new for all clients, litigators and mediators. In our experience of having undertaken virtual or live screen mediations, it’s the best bet in circumstances where parties genuinely cannot all be present at the same premises (even on a socially distanced basis), but it is simply not as effective as a live mediation with all the parties at the same venue, cooped up in their respect rooms for most of a day and with the mediator being able to shuttle between them in the flesh.

Perhaps one of the most well recognised users of online dispute resolution is Ebay. It is estimated that an incredible +50 million disagreements amongst traders on eBay, are resolved every year using online dispute resolution.

Virtual mediation is here to stay and is no doubt appropriate for low value disputes but where considerable sums are in dispute, serious consideration should be given to the traditional form of mediation even in the current circumstances.

For further advice on mediating, please contact Ian Timlin via his contact details below. Ian has been a CEDR accredited mediator since 2000.

Ian Timlin
Main: +44 (0)20 7390 0280
Mobile: +44 (0)77 6742 7332
ian@conexuslaw.com

This factsheet is for general information purposes only and does not constitute legal advice. The law is open to, and may have changed since this was written, and it cannot be relied upon as advice in respect of your particular situation. 05/08/2020

Fact Sheet: Beyond Covid-19 – How can commercial landlords and tenants compromise now?

It has been so encouraging to see shops, bars and restaurants take their first tentative steps out of lockdown, but it’s probably fair to predict that it will not be business as usual for the foreseeable future: changes in consumer habits and routines, financial uncertainty for many, and simple fear, will all continue to impact directly upon the ability of commercial tenants to cover the rent.

In a recent piece, we talked about whether or not these tenants remain obliged to pay the rent during the unprecedented set of circumstances we find ourselves in. The conclusion was compromise; yes, the rent should be paid, but keeping tenants intact and in situ would also be high on the list of landlord priorities.

When it comes to compromising for the benefit of both parties to a lease, there are no hard and fast rules, but here are some of the possibilities to consider.

Adjustments to rent

Rent free periods

  • A basic incentive – rent free periods are often used to incentivise new tenants to take on new leases – the GFC over a decade ago saw a huge increase in their use, and the current situation will continue to guarantee their popularity. And they might not be as unpalatable to landlords as they first appear – a one-time short sharp income-free period might be all that’s needed to get a tenant through the worst, or to get a new tenant into vacant premises.
  • Rent free after break date – scheduling rent free periods just after a break date is a well-trodden path for landlords to incentivise tenants to stay put beyond a potential future exit point, and makes sense in the current climate. Tenants will be looking for relatively short-order break options – they need to see how things unfold in the short to medium term. Any incentive to keep them in place beyond a break date will benefit the landlord and the cost of a rent free period can be offset against re-letting costs.
  • Deferred Payment – can a tenant see its way to deferring any unpaid rent until a later date? Whilst there are cash flow benefits for the tenant, there is risk here on both sides – rolling up liability for the tenant, and no guarantee that any deferred rent will ever be paid if the tenant cannot recover longer term.

“Structured” Rents
Looking slightly beyond the immediate crisis, a certain level of rental income is going to be required, with added pressure on landlords because of debt secured on property and obligations and covenants related to servicing that debt. Parties to existing or new lettings might think about the following:

  • reduced rent – either a reduction in a current rent or a lower starting point than would ordinarily be agreed in a new lease;
  • stepped rent i.e. dropping the rent to (or starting at) a lower level and then gradually increasing it again; and
  • a turnover rent – whilst on the face of it these might be wholly unpalatable to landlords in the current situation, they may offer some degree mutual benefit. Consider structures whereby the tenant pays a base level of rent, topped up according to the tenant’s income (i.e. a fixed percentage of the tenant’s net turnover). Over a temporary period, this could serve to provide the landlord with a certain amount of income whilst recognising the difficulties faced by so many tenants. Please see our piece “Beyond Covid: A Turnover Rent Resurgence?” for more detailed discussion.

Any of these structures could work in tandem with an element of deferred rent as described above.

Other financial concessions
Other options worthy of consideration include the following:

  • rent paid monthly instead of quarterly;
  • rent paid in arrears rather than in advance;
  • temporarily reduced service charges;
  • all-inclusive charges – where rent, insurance and service charges are payable at a fixed flat rate for a period of time at a level manageable for both parties; or
  • an express plan for a landlord to draw on any rent deposit whilst the tenant takes a rent holiday.

A “second wave”?

Looking beyond solely the rent provisions, here are some further points to consider.

  • Can a period of rent suspension be agreed pre-emptively? Suspension might be during periods of further government-ordered national or local lockdown, or during the imposition of restrictions which would affect the operation of a tenant’s business whether due to closure, or restrictions such as social distancing which would impact on the scale of its operations.
  • Break clauses are likely to be firmly on the radar too. We may see break dates falling slightly earlier in the term of new leases than before, or simply more of them during the term of a lease, or perhaps rolling breaks i.e. the option to break at any time subject to a notice period. Such rolling options might be exercisable up until a certain date in the term. We talk above about linking later break dates to rent free periods to incentivise tenants to remain in occupation rather than to break.
  • Whilst rather tenant-friendly in the shorter term, concessions may provide a degree of landlord leverage – parties to existing arrangements might for example settle an outstanding rent review, or perhaps delay a rent review until there is a generally more positive outlook. Landlords might achieve the removal of future tenant break clauses or other particularly tenant-favouring provisions in return for fairly generous short-term concessions.

Compromise with caution

If a compromise can be reached, always consider the following:

  • carefully document the time period for which any concessions will apply, and how and when any deferred rent will be paid;
  • does the letting document in question contain any break clauses, and is it conditional upon payment in full of rent (or any other sums) up until a given date? Ensure that the operation of the break is not frustrated by reason of payment of a reduced rent, or no rent, however temporary;
  • are there any rent reviews due during any concessionary period? Be express about how the parties intend any concession to impact on rent review – will it be disregarded or not?
  • is the lease potentially due for renewal? Beware the possibility of concessionary terms being carried over into a new lease – existing terms are often the starting point for renewal leases, particularly those within Part II of the Landlord & Tenant Act 1954;
  • are the concessionary terms, however temporary, binding either parties’ successors in title?
  • if there is any guarantor who will need to be a party to documentation? Make sure that they are so as to avoid inadvertent release from guarantor obligations;
  • are any third party consents required, from lenders or superior landlords or the like? Obtain these so as to avoid a breach of superior lease covenants and/or loan documentation;
  • check rent deposit arrangements and whether even an agreed payment of a reduced or nil rent would amount to a failure to pay rent, and an entitlement for the landlord to draw on any deposit.With new rent deposits, be clear as to whether they can be drawn upon during any pre-agreed period of potential rent suspension or reduction – a tenant may see an ability to draw as defeating the object of rent suspension, but a landlord might argue that it still offers some breathing space for the tenant;
  • if documentation needs to define a trigger for any future concession arrangement i.e. further lockdown or other similar restrictions to manage Covid-19, ensure that any definitions work for the specific lease, tenant, business, or location in question; and
  • if leases are varied (rather than concessions being made) always seek tax advice particularly in respect of Stamp Duty Land Tax.

Fact Sheet: Beyond Covid-19 – A Turnover Rent Resurgence?

Would-be commercial tenants no longer know whether to take on a new lease. Existing tenants are looking for ways to adjust arrangements with landlords in order to survive the impact of the recent lockdown. Could something reminiscent of the traditional turnover rent now be a way to pin rental levels to the performance of a tenant’s business, during a unique period of economic uncertainty?

Yes, but whereas historically, turnover structures would see a landlord share in the very good times with the tenant, we’ve now seen measures undertaken on a global scale which have had an unmatched negative effect on the performance of businesses with a necessary physical presence – cafes, bars, restaurants, and retail.

Whilst some sectors have thrived – data, hosting, and connectivity, as well as e-commerce and the tech industry – some others have seen their revenue decimated and through no fault of their own; not many businesses could have foreseen to protect themselves against the consequences of coronavirus.

Whilst we cautiously emerge from lockdown and do all that we can to avoid a second wave of the virus, the turnover rent approach could prove a useful tool, for both new and existing commercial tenants.

Traditionally, turnover structures would see a base level of rent paid (usually around 75-80% of the open market value), and a top-up element which would be a percentage of the tenant’s net turnover over a given time period – usually between 5-12%.

This would generally have to be in tandem with a landlord option to fall back on a full open market rent if turnover fell below a certain threshold, and in some specific cases, keep-open covenants by the tenant such that turnover could be optimised – obviously for the purposes of making life easier in the current circumstances, an ability for the landlord to do either of these things would defeat the object somewhat.

If we assume a period of zero turnover (no longer unthinkable), a base rent would at least provide the landlord with some degree of certainty of continued rental income, and some capacity to satisfy any related loan obligations and covenants. At the same time, the tenant might be cushioned from the very worst of any ongoing or renewed impact on its business.

But many businesses occupying commercial premises are no longer holding back in requesting full turnover rents across entire existing portfolios i.e. no base rent, solely a rent linked to turnover.

On the face of it, this will be hugely unpalatable to commercial landlords, but faced with the dual prospect of tenants that simply won’t survive if they must pay rent over and above a level linked in some way to their income, and a potentially pretty tough lettings market, turnover only structures might begin to look more feasible, perhaps even as a temporary measure.

A deferred rent structure in place alongside a wholesale turnover rent might soften the blow i.e. allow the tenant to pay a turnover-only rent, with a structure to claw back a perceived “shortfall” once certain conditions are met, or at a certain point in the term. These structures carry some risk in that there’s no guarantee the tenant will ever be able to pay the shortfall in the future, and if used, they should be carefully documented as to exactly how the shortfall will be calculated and with reference to which income figures, and when and how it is expected that any shortfall will be paid to the landlord.

And what else is there to look out for?

Turnover rent provisions in leases are reasonably complex, and the gathering and provision of evidence of turnover, as well as the potential professional verification or audit of calculations can be burdensome and costly. These calculations also have great potential to lead to dispute. Any party considering a turnover structure must take expert advice, and ensure that there is appropriate provision in the lease for dispute resolution.

The parties will also need to be clear on what is and is not regarded as turnover.

Traditionally, items such as VAT on goods, refunds or credits for returned or faulty goods, or allowances for exchanged or traded in goods, or customary discounts given by a tenant, would all be discounted for the purposes of calculating a net turnover. Tenants will be keen to carve out income from online sales too i.e. that not generated on the premises in question.

Implementation of a turnover rent would also be the time to consider re-tightening returns policies for goods sold – many retailers relaxed and extended these during the height of the lockdown, but when it comes to turnover rent estimates and calculations, good turnover visibility is important.

Whether agreeing new terms or amending existing ones (whether as temporary concessionary arrangements or via more permanent variations to leases), rent review and alienation provisions are also matters to consider.

How is any turnover rent, whether a temporary or permanent arrangement, to be treated on rent review? Will “usual” assignment and subletting provisions apply? Or, did the landlord envisage a turnover rent with one specific tenant in mind? If an assignee or subtenant coming into occupation on any basis remains a possibility, will the turnover rent provisions be suspended for all or part of the remainder of the term, and if so, what will the substitute rent be?

Lastly, the following should always be kept in mind if changes are being made to existing arrangements, whether they manifest as concessions or variations:

  • the circumstance in which, and for how long any temporary arrangements apply;
  • whether the operation of any break option could be frustrated by reason of payment of a reduced rent, however temporary;
  • whether the parties’ successors in title are bound by any new arrangements;
  • whether any guarantor needs to be a party to new documentation;
  • whether any third-party consents are required, from lenders or superior landlords or the like;
  • rent deposit arrangements, and whether they can be drawn upon if a turnover rent produces a perceived shortfall as against the usual full rent; and
  • where changes to existing leases amount to a variation, always seek tax advice particularly that pertaining to Stamp Duty Land Tax.

Fact Sheet: Employment matters to consider as we prepare to emerge from lockdown

The government has set out plans to take the UK out of lockdown and allow the economy to restart safely while continuing to minimise the spread of the coronavirus. It has issued and continues to issue guidance and mandate actions that businesses and individuals must take to support this effort.

We have no reason to believe that restrictions on how businesses operate will be lifted in the near future, and employers should plan now to meet their obligations in this regard.

As the government winds down the coronavirus job retention scheme, it is anticipated that a significant proportion of employers will face difficult economic choices regarding their workforce in the absence of government assistance. Employers should urgently consider what working arrangements, including working hours, shift patterns and rates of pay they will provide to their staff when flexible furlough is introduced on July 1st, and as government assistance under the job retention scheme is withdrawn.

This note provides some valuable, practical steps for businesses in relation to their employees and working practices as we cautiously resume ‘normal’ working patterns.

Fact Sheet: The Government Coronavirus Job Retention Scheme

The Coronavirus Job Retention Scheme, which is designed to support employers whose operations have been severely affected by coronavirus, will end on 31 October 2020.

Since 10 June 2020, no new employees may be placed on furlough other than parents returning from statutory maternity or paternity leave.

Until 31 July, employers can claim 80% of furloughed employees’ usual monthly wage costs, up to a cap of £2,500 a month, in addition to the associated Employer National Insurance Contributions and minimum automatic enrolment employer pension contributions.

From 1 August until the scheme ends, employers will begin to resume the burden of employee costs as set out below. HMRC launched an online portal on 20 April, where employers can make one claim per pay period.

Fact Sheet: Claiming interest and other costs

If you are owed money and are making a claim for it in a letter or email, do not forget to make a claim for interest and other costs that you may be entitled to…

Fact Sheet: Publishing a modern slavery statement during the pandemic

Under the Modern Slavery Act 2015, commercial organisations that meet the requirements below are required to publish an annual modern slavery statement setting out the steps they have taken to identify and address their modern slavery risks:

  • ‘body corporates’ or partnerships, wherever incorporated or formed
  • that carry on a business, or part of a business, in the UK
  • and supply goods or services
  • with an annual turnover of £36 million or more.

Fact Sheet: Update on Telecommunications Infrastructure (Leasehold Property) Bill 2019-21

The Johnson government plans to roll out UK-wide gigabit-capable broadband by 2025.

The Telecommunications Infrastructure (Leasehold Property) Bill 2019-21 is set to amend the 2017 Electronic Communications Code, so as to streamline the process by which network operators may gain access to multi-let residential properties.

It is hoped this will deal with the particular problem of the landlord who is unresponsive to requests to allow access.