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What can you do if a tenant becomes insolvent?
We have all seen the headlines – another High Street store closing down and leaving an empty property behind. Many High Streets and Retail Parks now have not only one or two but a number of empty premises. These are worrying times for Landlords who may not only be left with rent arrears and dilapidations to deal with but also face the problem of finding a Tenant who is willing to take on a new lease in these uncertain times.
Dealing with the risk of rent arrears.
Don't wait until the Tenant is in arrears - be proactive from the outset. Keep in touch with Tenants and keep an eye on their business itself and also the business sector. Look for indicators that the Tenant may be struggling, such as:
- Persistently paying rent late (especially if they have previously been a good payer)
- Requests to vary payment schedules – typically requesting to pay monthly rather than quarterly
- Redundancies being made by the Tenant
- Requests to sublet or assign
These are just some of the signs that may highlight a potential problem. It might be worth speaking to the Tenant to see if there is any arrangement you can come to which may help both parties. Many Landlords have agreed to receive rent monthly in order to help Tenants with their cashflow. The JJB Sports Ltd CVA was an example of an agreement between Landlords to secure themselves some recompense from a struggling business. Creditors and Shareholders agreed to JJB closing 140 stores and paying compensation to those Landlords totalling £40 million. It was agreed that they would pay the rent on the remaining 250 shops monthly.
If the Tenant has stopped paying the rent, what can Landlords do?
Use the Rent Deposit Deed
If a rent deposit deed has been provided then use the monies under this to recover any rent arrears. Remember to comply with the terms of the Deed – many require that you give the Tenant notice before withdrawing funds. Be aware that this is not a bottomless pit and further action made by required later if rent arrears continue to persist.
Distress
This is an old common law remedy and was due to be replaced by the new Commercial Rent Arrears Recovery procedure. This has not yet been implemented so distress still remains a viable option. It is only available to Landlords of commercial premises and it is only actionable for rent arrears. It enables the Landlord to “distrain” (i.e. seize goods) against goods at the Tenant’s premises and retain them until either the rent arrears are paid off or the goods are sold to off-set the rent arrears.
Forfeiture
Landlords can only exercise their right to forfeit (i.e. re-enter the premises) if this has been reserved in the Lease. Unless the Landlord is exercising its right to forfeit in respect of rent arrears a strict procedure must be followed. Landlords must also be careful not to waive their right to forfeit and should be wary of claims for relief against forfeiture.
Landlords should also consider the ease at which they are going to be able to re-let the premises before they go down this route.
Guarantor action
If the Landlord is lucky enough to have a Guarantor under the Lease then it can require the Guarantor to comply with the Tenant’s obligations – including paying the rent.
Third Party Recovery Actions
If the Tenant has sublet the premises then it is possible for the Landlord to serve notice on the sub-tenant requiring it to pay all future rent direct to it.
If the Lease has been assigned and an AGA (Authorised Guarantee Agreement) was entered into, then Landlords can look to the original Tenant to pay the rent arrears and comply with any other Tenant obligations.
Statutory demand
If the debt is for £750 or more the Landlord can serve a statutory demand on the Tenant. If the Tenant does not comply with the statutory demand then the Landlord can wind up/make bankrupt the Tenant. However, in this current climate this may be the straw that breaks the camel's back and the Tenant may decide to fold rather than struggle on, leaving the Landlord to fight alongside other unsecured creditors for a share of the Tenant’s assets.
Formal proceedings
One option that it always available to Landlords is that of taking court action for rent arrears. However,before contemplating this route, you need to ask yourself whether you will be able to enforce judgement if the Tenant is insolvent.
If the Tenant is insolvent then the Landlord maybe prevented from exercising some of these options.
What if the Tenant is Bankrupt?
- The right to distrain is limited to the recovery of rent for 6 months prior to the bankruptcy. If the trustee in bankruptcy does not disclaim the Lease then the Landlord can also distrain for rent after the date of bankruptcy.
- Bankruptcy does not affect the Landlord’s right to forfeit.
- The Court may stay an action for recovery of rent arrears.
- The Trustee in bankruptcy can disclaim the lease.
Individual Voluntary Arrangement/Company Voluntary Arrangement
- Landlord’s only remedy lies in the IVA/CVA – it cannot bring a claim for rent arrears/dilapidations.
- Landlord can distrain or forfeit the Lease but needs consent of the Court first.
- Recovery is unlikely to be in full.
- The nominee/trustee cannot disclaim the lease.
Administration
- Moratorium is imposed once Administrator is appointed – this prevents the Landlord from taking any action.
- Landlord can distrain or forfeit the Lease with the consent of the Court.
- Administrator cannot disclaim the Lease.
- In relation to ongoing rent, as the rent forms part of the administration costs the Administrator should continue to pay.
Liquidation
The Tenant remains liable under the terms of the Lease and its liabilities will continue until the Lease is disclaimed or forfeited.
- Landlord can prove in liquidation for the rent arrears.
- If the liquidator uses the premises then it should continue to pay the rent as an expense of the liquidation.
- Landlord might be able to distrain or forfeit – but this depends on whether liquidation is compulsory or voluntary.
- The Liquidator can disclaim the Lease.
Disclaimer of Lease
- If the Lease is disclaimed then the Landlord can look to the Guarantor (if there is one) to take on a new lease. Any sublease would remain in existence.
- Landlord can claim for loss of future rent.
This article provides general guidance only and is not a substitute for specific legal advice.
If you wish to discuss how to deal with an insolvent tenant in more detail then please contact our Commercial Property Team – Sue Albini on 01827 317088, Kate Pearce on 01827 317057 or Sophie Magson on 01827 317064– who will be happy to provide you with further advice.
