Tenant insolvency: Consequences and Recourse for a Commercial Landlord

Insights - 17/08/2018

With more and more well-known high street names announcing store closures and leaving empty premises behind, the current economic climate is a worrying time for commercial landlords. Lily Meyer, an Associate Solicitor in our Commercial Property department looks into Tenant insolvency and the consequences and recourse for a Commercial Landlord in this blog for our Corporate Insights newsletter.

When a tenant becomes insolvent, commercial landlords can find themselves left with rent arrears and dilapidated properties, often with little recourse. The usual remedies for a landlord, such as exercising commercial rent arrears recovery against the tenant’s goods, applying for recovery through the courts and/or forfeiting the lease may become restricted once the tenant is close to, or becomes, insolvent. This is because enforcement action can be restricted depending on the regime of insolvency the tenant has taken.

For example, if a tenant company has entered into a Company Voluntary Arrangement (CVA), the landlord will be bound by the terms of the CVA, which could restrict how the rent arrears are recovered and could even restrict forfeiture of the lease. Likewise, if an application for an administration order has been made, a landlord will be required to obtain court or administrator approval before commencing any proceedings against the tenant company. Even worse, if the tenant is an individual, once an interim bankruptcy order has been approved, a landlord will be unable to recover any debt that forms part of the bankruptcy application. However, this wouldn’t usually prevent a landlord being able to forfeit the lease.

It is therefore essential that a tenant’s financial stability is kept in the forefront of a landlord’s mind, not only when negotiating a new letting, but also throughout the term. For example, if a tenant is persistently late in paying its rent, the landlord should keep an eye on the business sector and the company’s records, as this could be an indication that the tenant is experiencing financial difficulties. An application for consent to assign or sublet could be another indication that a tenant is struggling. Where this is the case, landlords should consider whether the proposed assignee or subtenant could have better financial strength than the existing tenant, and if so, provided that appropriate conditions are put in place, it would usually be advisable for a landlord to consent to such assignment or subletting, to prevent further problems later on.

If a tenant has already stopped paying the rent, but has not yet become insolvent, there are various steps a landlord can take to recover what is owed. If a rent deposit has been provided, usually the first step would be to recover any monies owed from that deposit, including the cost of the recovery (such as legal or professional fees). If the tenant has a guarantor, or a personal guarantee has been given, a landlord can require the guarantor to comply with the tenant’s obligations, including paying the rent. If the tenant has sublet the property to a subtenant, there may also be an option of obliging the subtenant to pay the rent due under the headlease directly to the landlord.

If the lease expressly permits it, landlords can also exercise their right to forfeit the lease. It is important however, that strict procedures are followed. Landlords must be careful not to waive their right to forfeit and should be wary of claims for relief against forfeiture.

Lastly, if a landlord is aware that a tenant struggling, it should also consider whether negotiating a surrender, perhaps at a premium, would be beneficial. A condition of the surrender could be that all arrears (if any) are paid up to date and this will then give both the tenant and landlord a clean break to move on so the landlord can let the property to someone new.

Most importantly, however, landlords should remember that, once the tenant enters into an insolvency process, the landlord’s rights are likely to be restricted, so it is important to act quickly as soon as it suspects the tenant could be in trouble.

 

Other articles from August's newsletter

Disclaimer:

Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.