In the modern world, tenants becoming insolvent is a common feature and something that commercial property landlords need to consider as a possibility.
A landlord wants their tenants to pay the rent and observe the terms and conditions in the lease for the whole of the lease term, but circumstances might arise where the tenant cannot afford to pay the rent, and the landlord therefore needs to think about what remedies it might have if the commercial tenant becomes insolvent.
The tenant may be an individual, and they may become personally bankrupt and stop paying the rent, or, in many instances, the tenant might be a limited company and if the company becomes insolvent, they may stop paying rent and the landlord will have to consider what rights they have, depending on the type of insolvency, in order to take further action.
The company might enter into any one of the following corporate insolvency regimes:
- Part A1 moratorium;
- a company voluntary arrangement;
- into administration;
- into receivership; or
- be wound up and go into liquidation.
For individuals, there are two regimes, namely:
- an individual voluntary arrangement; or
- bankruptcy.
Landlords should be aware that the steps they can take following their tenant’s insolvency depend on the insolvency path being followed by the tenant.
For example, where the tenant is a company, if it enters into a Part A1 moratorium, then the landlord would need the permission of the Court before it could take any enforcement action. Alternatively, permission would be required from the court or the consent of the administrator if the tenant company enters into administration.
What are the immediate steps when tenants become insolvent?
One of the first things a landlord might want to consider is the safeguards that were put in place when the lease was granted. For example, was a rent deposit deed entered into and does the landlord already hold monies to be able to discharge the rent? Did the tenant company have a guarantor to the lease, and is the guarantor able to be pursued?
Another consideration is whether there is an undertenant in lawful occupation and whether the landlord can serve notice on the undertenant to pay their rent directly to them, rather than to the insolvent tenant.
Whether a landlord can take money from a rent deposit will depend on who holds the deposit and the terms under which it is held. The landlord may need to take court action to enforce the contractual terms of the deposit, depending on how it is drafted.
If the landlord needs to recover monies from a former tenant or guarantor, then a Section 17 Notice under the Landlord and Tenant (Covenants) Act 1995 may need to be served within six months of the rent becoming due. Early legal advice is always beneficial in these circumstances.
What are your rights when a tenant goes into administration?
Administration is a process that provides a framework for the potential rescue of a company that is insolvent. An administrator will be appointed, and once the administration has formally started, a ‘stay’ will come into immediate effect for six months. This is known as the moratorium.
The point of the moratorium is to allow the company to continue to exist and hold property, whilst its administrator investigates whether there is any chance of the business being rescued.
Whilst the moratorium is in place, the actions available to a landlord are limited. To take action to recover their arrears or enforce any covenants under the lease, the landlord must either obtain the court's permission or the administrator's consent. A landlord might want to exercise CRAR (Commercial Rent Arrears Recovery) by going into the property and seizing goods to the value of any arrears, or forfeit the lease by changing the locks, or sue the tenant for a money judgment for the arrears or take any other steps to enforce security, but they will not be able to do any of those steps without the permission of the court or the administrator.
What are your rights when a tenant goes into administration?
As mentioned above, a landlord's hands can be very tied once a tenant goes into administration. In some circumstances, it may be worthwhile seeking consent from the administrator to take steps to enforce the terms of the lease, but even if the administrator refuses to give consent, an application to the court may be appropriate in limited circumstances.
What can the landlord claim during the liquidation process?
Winding up or liquidation in this context means that there is a realisation of the company's assets, the liabilities that it has are settled, and the company is then dissolved and taken off the Companies House register. A company does not have to be, but usually is, insolvent in order to be wound up. There are two types of winding up, namely a voluntary winding up or a compulsory or court winding up.
A landlord may still be able to use the remedy of CRAR if a company is wound up voluntarily. However, if the landlord began the process of exercising CRAR before the start of the voluntary winding up, the landlord can only retain the benefit of CRAR if the assets had been sold before the start of the liquidation.
A landlord can also, without needing permission from the court, sue the tenant company for rent and forfeit the lease, whether that is done by changing the locks or through court proceedings.
In some cases, the rent might be an expense of the liquidation, and the liquidator might pay the expenses, in priority order, to any persons who have floating charges or ordinary unsecured creditors. If the rent does rank as an expense of the liquidation, this may influence a landlord's decision on whether or not they want to forfeit the lease.
For example, if the liquidator wants to hold on and use the premises to assist them in selling the assets of the company, then the rent that falls due under the lease during the company's period of occupation will be a necessary disbursement of the liquidation and an expense that the liquidator has to continue to pay to the landlord.
What does a lease disclaimer mean for landlords?
The lease disclaimer means that once a notice has been served by the liquidator, the tenant company no longer has any interest in the lease or obligations to pay rent or abide by any of the tenant covenants. A lease disclaimer brings to an end any ongoing obligations of the insolvent tenant, with effect from the date of the disclaimer notice.
If the insolvent tenant had a guarantor to their lease, then the guarantor remains liable for any outstanding rent under the disclaimed lease, as well as for future rent and compliance with the lease covenants.
How can a landlord prove a claim in insolvency proceedings?
The landlord should make immediate contact with the insolvency practitioner and, where appropriate, lodge a proof of debt with them to establish their claim for a financial remedy.
What are the forfeiture rules during insolvency?
This depends on the form of insolvency that the tenant company has fallen into.
What are guarantor rights during tenant insolvency?
Again, this depends on the terms of the guarantee that the guarantor has originally given and the form of the insolvency into which the tenant company falls. For example, if the tenant company is put into liquidation and the liquidator disclaims the lease, the guarantee would remain operative, and the disclaimer does not affect that.
How can you plan for tenant insolvency risk?
Unfortunately, tenant insolvency is a feature of modern life and can happen regardless of the safeguards that are put in place at the start of the lease to try to protect the landlord.
Landlords should undertake due diligence on their tenants at the point that they are granting leases, to understand their financial viability. Credit reports should be considered to ascertain the true liquidity position of the proposed tenant and their likely covenant strength.
Rent deposits should be considered, as should the request for a guarantor.
This information is for guidance purposes only and does not constitute legal advice. We recommend you seek legal advice before acting on any information given.
