If property you own is occupied by a corporate tenant who enters into an insolvency process, there may be restrictions on the way you can recover debts and minimise future losses.
Recovery and insolvency options
There are several different insolvency processes that may be used.
Generally, an administration or a company voluntary arrangement (CVA) will be used if there is a possibility of rescuing a company. A creditors’ voluntary liquidation (CVL) is an insolvent winding up procedure which normally means that a tenant will cease trading.
The most common insolvency procedure that is used to try and rescue a company outside of the retail and hospitality sectors is administration, whereas CVAs are typically used by businesses operating multiple retail, hospitality or leisure outlets.
In property law, a landlord would normally forfeit a lease following a breach of a tenant’s obligations. This terminates the lease and allows a landlord to find a new tenant. However, in an administration there is no right of forfeiture, nor is a landlord able to enforce a claim without leave of the court or the consent of the administrators.
What should a landlord do?
Communication with the administrator is key. Is their intention to sell the business as a going concern? If so, the administrator may seek to grant a short-term licence to occupy or seek an assignment of the lease, as part of the sale. In these circumstances the ongoing rent, prior to the completion of any assignment, will be paid as an expense of the administration in priority to other creditors.
If an assignment is not a possibility, then as a landlord you may wish to accept a surrender of the lease to enable you to find a new tenant. You will need to consider the health of the rental market when considering your options. For example, you may prefer to negotiate different terms with a potential tenant, rather than having a vacant property that will be subject to business rates.
What is the position if the tenant enters into a CVL?
Here, there is little chance of an assignment of the lease. However, a landlord can, in theory, continue actions to recover unpaid rent and can forfeit the lease. You must be mindful that in these circumstances a liquidator can apply to the court to prevent the progression of any legal proceedings. Also, a landlord does not have the right to enter the premises to recover rent arrears by taking control of the tenant’s goods and selling them.
Is there anything that a landlord can do?
There are limited steps a landlord can take once a tenant goes into liquidation. If the liquidator requires the premises temporarily to secure a sale of company assets, or to convert work-in-progress into finished goods, then you are entitled to receive rent for the period of occupation. However, if the liquidator does not require the premises, they can disclaim the lease if it deemed to be onerous. Here the property is handed back to the landlord, who will take on ongoing liabilities.
What about the outstanding rent and dilapidations?
In the case of both a CVL and administration, the landlord can claim as an unsecured creditor for rent arrears and dilapidations, less any rent deposits received. Another major liability that can be claimed as an unsecured creditor, is the future rents that accrue under the terms of the lease. It should be remembered that landlords have a duty to mitigate their losses and to try and find a new tenant. You can only claim for future rents for the time that it would be reasonable to take to find that new tenant.
In a CVA, landlords receive notification of the proposed CVA which will detail how they will be treated within the CVA. Landlords will usually be divided into different categories, which will depend in the main upon how well the particular business unit is performing and whether or not it is deemed to be over rented. Some landlords may be unaffected by the CVA and continue to receive rent in full, whilst others may be severely compromised by the terms of the CVA. If 75% of all creditors who vote, vote in favour of the CVA, it will be approved. It is therefore important to take advice from your accountant or solicitor if you receive a CVA proposal in order to understand your options.
Lessons to be learned
If a tenant becomes insolvent, then this can be a time consuming and costly matter for a landlord. You should always carry out a level of due diligence on a future tenant, particularly their financial position. A rent deposit must be requested to provide security against damage and rent arrears. Also, wherever possible a guarantor should be sought who would be liable for rent arrears if the tenant cannot pay. Use of a solicitor who is experienced in producing commercial leases is another necessity. This will help you to terminate a lease if the terms have been breached and help you to avoid the large potential losses incurred if your tenant is still in occupation when they become insolvent.
For further information and advice about your position as a landlord if your tenants enter an insolvency process, please call 0808 144 5575 or email help@armstrongwatson.co.uk.
