FOR LANDLORDS: TENANT INSOLVENCY
The key issue for landlords is often the loss of rental income, which can lead to breaches in banking covenants, leaving the landlord at risk of their loans being called in. The landlord has various options to deal with an insolvent tenant and a brief summary of these is set out below.
It is important to note that not all methods are available for all insolvency types (for example, if a tenant is in a Company Voluntary Arrangement (CVA) the landlord may only draw on a rent deposit if the terms of the CVA permit this). In addition, some remedies cannot be implemented during statutory moratorium periods. It is therefore important to take advice before taking any action.
Guarantors: A landlord will often be able to call on one or more guarantors. Guarantors include not only traditional guarantors (given, for example, by a parent company, director or owner) but also:
- in relation to a lease dated before 1 January 1996, the first tenant and possibly all other former tenants; and
- in relation to most leases made after 1 January 1996, the former tenant, assuming they entered into an ‘authorised guarantee agreement’.
Complex rules apply and, to avoid losing the right to recover, a formal notice must be served on each guarantor within six months from the date the arrears first became due. Further notices can also be due in connection with rent reviews if the landlord wishes to seek to recover an increase in the rent.
Sub-tenants: If there is a sub-tenancy in place, landlords can require that the rent paid by the sub-tenant be paid direct to the landlord (rather than to the tenant). To do this the landlord must serve a formal notice on the sub-tenant.
Rent deposits: Drawing on deposits can allow the landlord to maintain its income stream whilst perhaps seeking a new tenant or exploring other options. As with all remedies, this is not available in all circumstances, and also depends on the exact terms of the rent deposit deed and the deed having been registered at Companies House where required.
Forfeiture: In the current market forfeiture is often an unappetising prospect, although it can be useful where a new tenant is likely to be found quickly. Where forfeiture is available, it is worth noting that relief against forfeiture (whereby the courts have discretion to ‘cancel’ retrospectively forfeiture action taken by a landlord) is available to the relevant insolvency supervisor in the same way as it would be for the tenant. Whilst in most cases this is irrelevant (because the insolvency supervisor will not be in a position to satisfy conditions attached to the grant of relief, which will usually require payment of all arrears) it is possible for insolvency supervisors to attempt to ‘save’ flagship or critical premises by applying for relief, especially prior to a ‘pre-pack’ administration. This may not be a landlord’s preference if another tenant is lined up to take the premises.
Distress: In certain circumstances it is possible for a landlord to remove goods from the premises to cover monies due to the landlord. This can be a valuable remedy depending on the nature of the tenant’s business. However, legislation is in place (although not yet in force) which replaces the remedy of distress with a new remedy known as “Commercial Rent Arrears Recovery”. There is currently no indication of when the legislation will be brought into force but it is anticipated that the new remedy will make it more difficult for goods to be
FOR TENANTS: LANDLORD INSOLVENCY
If you are a tenant whose landlord becomes insolvent, the key issues are likely to be practical ones. The landlord is likely, at least in the short term, to cease providing any services, which may be a significant concern if your lease is of part of a building, or of a unit at an estate or shopping centre. It is also likely to be significantly more difficult to obtain any landlord’s consents, which could interfere with alterations or a proposed disposal of the lease. Taking proceedings against a landlord for breach of its obligations may not be possible should any statutory moratorium be imposed. The various insolvency regimes have different rules so before taking any action against an insolvent landlord, legal advice should be sought.
Where its landlord is insolvent, a tenant can be exposed to the risk of losing any monies held by the landlord as a rent deposit (or, at least, ranking as an unsecured creditor and typically securing the return of only a small portion of the deposit). Whilst it is possible to prevent this by structuring a rent deposit deed carefully when it is entered into, some tenant’s solicitors are not aware of this risk and, in any event, some landlords will not accept any such amendment.
Many insolvency remedies require formal legal notices to be served, or other formal
- procedures to be followed. Take advice at an early stage (ideally before any formal
- insolvency process begins) to ensure your rights are preserved.
- As a landlord, think carefully before taking back occupation of premises, which can
- prejudice claims against guarantors and sub-tenants.
If you have any questions or would like further advice in connection with any matter or issue raised by this note, please contact your usual contact at Stevens & Bolton LLP.
This information is necessarily brief and is not intended to be an exhaustive statement of the law. It is essential that professional advice is sought before any decision is taken.
©Stevens & Bolton LLP, May 2013