Insolvent tenants of commercial premises  – what are a landlord’s options?

James Parratt is in the real estate disputes team at Thomson Snell & Passmore

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.

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.

Administration

Administration is a process to attempt to rescue an insolvent company so that it can continue to trade as a going concern.

Insolvency Practitioners (“IPs”) are appointed as administrators who have wide-ranging powers to manage the insolvent company.

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.

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 can 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.

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.

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.

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.

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 if the tenant has vacated.

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.