Insolvency numbers have risen 10% from a year ago and the number of companies that are going bust this year is on track to be the highest since the financial crisis in 2009. Over recent years with the challenging economic pressures, landlords are becoming increasingly concerned with understanding their options when they encounter an insolvent tenant.
A tenant may elect to enter into an insolvency regime or they may be forced into one by a creditor. It is important for landlords to understand their options when dealing with a tenant that has entered into an insolvency regime and to remember that their common remedies against a defaulting tenant may be curtailed depending on the insolvency regime.
We set out below the more common regimes a landlord may encounter when their tenant is insolvent, and a brief overview of the effect those regimes have on a landlord's rights.
Administration
Administration is a process to attempt to rescue an insolvent company so that it can continue to trade as a going concern. The directors can put the company into administration, or a creditor can do so.
Insolvency Practitioners ("IPs") are appointed as administrators who have wide-ranging powers to manage the insolvent company. If the company cannot be rescued, the administrators will look to realise the assets for the benefit of the creditors.
A moratorium takes effect when administrators are appointed over a company (and possibly beforehand), preventing creditors from taking action against the insolvent company. The moratorium restricts the landlord's ability to deal with its premises and the tenant.
For example, a landlord requires the permission of the court, or the consent of the administrator(s), before it can:
- Forfeit the lease by peaceable re-entry
- Commence or continue court proceedings against the tenant, including proceedings for forfeiture of a lease
- Exercise commercial rent arrears recovery ("CRAR")
- Take steps to enforce security.
A landlord can pursue guarantors under a lease for any sums owed as well any previous tenants under an Authorised Guarantee Agreement, colloquially known as an AGA.
Similarly, a landlord can claim rent owed under the lease of the tenant in administration from a sub-tenant, if there is one.
Company Voluntary Arrangement ("CVA")
A CVA is an insolvency regime whereby a tenant company enters into an arrangement with its creditors that compromises debts owed to its creditors. IPs oversee the management of a CVA.
A CVA can be an effective restructuring regime to, in essence, get rid of undesirable leases and change the rents payable under other leases.
For example, a retail chain, which has units across the country which hits financial difficulties, can use a CVA to seek to retain the profitable stores, restaurants, gyms (whatever the case may be) and get rid of those units/leases that are undesirable.
A CVA can also manifestly change the terms of a lease, including, the amount of rent payable to the landlord for the rest of the term.
The better news for a landlord is that it will receive notice of a proposed CVA before the arrangement becomes binding on them.
Accordingly, a landlord can review its position and decide if the proposed terms of the CVA are acceptable, or exercise any of its rights and remedies available to it prior to a CVA becoming binding on them. A CVA can become binding on a landlord even if that landlord does not take part in the voting process leading to the CVA coming into effect.
When a CVA becomes binding on the landlord, the terms of the CVA will, in essence, govern the action the landlord can take against the tenant. The CVA will typically restrict the action a landlord/creditor can take in respect of the debts comprised in the CVA.
Liquidation (compulsory and voluntary)
Liquidation, or winding up, is an insolvency regime which winds up the company and realises assets to creditors. Compulsory liquidation occurs when a creditor obtains an order from the court to wind up the debtor company. Whereas voluntary liquidation is commenced by the members of the company.
The effect of compulsory liquidation will curtail a landlord's the usual remedies available. For example, a landlord requires the permission of the court, or the consent of the liquidator(s), before forfeiting the lease by peaceable re-entry and/or commencing or continuing court proceedings against the tenant, including proceedings for forfeiture of a lease.
Similarly, compulsory liquidation may also restrict a landlord's ability to exercise CRAR.
With voluntary liquidation, a landlord can exercise any remedies available to it although the liquidator can apply to the court to restrain the landlord from exercising the chosen remedy.
A landlord can serve notice on the liquidator requiring them to elect, within 28 days, whether or not to disclaim a lease. If no notice is served, a liquidator can disclaim a lease it considers to be onerous.
Disclaiming a lease will bring to an end all tenant liabilities. A disclaimer will not, however, prevent a landlord from pursuing guarantors under a lease for any sums owed as well any previous tenants under an AGA.
Similarly, a landlord can claim rent owed under the lease of the tenant in administration from a sub-tenant.
Bankruptcy / Individual Voluntary Arrangements ("IVA")
Instances where a tenant of commercial premises is an individual (or more than one individual), a landlord may be unable to pursue its usual remedies depending on the insolvency regime.
For example, a landlord can forfeit a lease by peaceable re-entry or issuing proceedings where a tenant that has been declared bankrupt. Whereas a landlord cannot forfeit the lease without the court's consent during the moratorium of an IVA.
With a bankrupt tenant, a landlord can serve notice of the trustee in bankruptcy to elect whether to disclaim the lease.
Practical steps
Initially, a landlord should ensure the premises are secured (checking the safety of heaters, electrics, gas, water etc. being switched off) if the tenant has vacated. A landlord should be mindful to communicate with the tenant and/or the IP that the changing of the locks was for security purposes and not intended to be an act of forfeiture or an implied surrender.
If landlord is aware of a tenant facing financial struggles, consider whether or not action ought to be taken before a tenant enters into an insolvency regime.
If, however, it is too late and a tenant has already entered into an insolvency regime, check Companies House for details of the IP appointed or for the Official Receiver to open a channel of communication. This will be key to determine their intentions with the premises and lease, and a landlord can obtain advice and take action accordingly.
The proactive steps a landlord can take before granting a lease is undertaking due diligence on the financial health of the prospective tenant, obtaining a deposit and getting a third party guarantee.
A version of this article first appeared in Propertywire.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
