How does insolvency of a corporate tenant with rent arrears affect a Landlord

All of the government emergency legislation for COVID that was designed to prevent commercial tenants being wound up or leases forfeited because of rent arrears arising from the COVID pandemic have gone.

The compulsory arbitration scheme that enabled tenants to apply to have rent arrears reduced or a payment plan put in place, ended in September 2022.

Landlords have back, all the tools back in the tool box to deal with defaulting tenants. The problem of course is that we now have surging interest rates, global inflation and increasing uncertainty about the economy; not to mention the concerns about the war in Ukraine spilling out into other neighbouring countries.

Tenant companies that managed to struggle through COVID because of the restrictions placed on Landlords, will continue to face difficulties. The expectation is that there will be a sharp increase in companies going into Administration or Liquidation over the next 12 months. Landlords may decide that having a tenant in place paying reduced rent is better than having no tenant at all; but that decision may be taken out of their hands if a tenant company is placed into Administration or Liquidation by a third party.

The principle behind the Administration process, is: Firstly, to see if the company can be rescued as a going concern. If that is not possible, to achieve a better recovery for creditors than could be achieve din liquidation and lastly; to realise assets for the secured/preferential creditors.

Whilst in Administration there is an embargo on landlords using their rights to:

• levy distress [appointing bailiffs to enter the property to seize goods as security for rent arrears];
• forfeit the lease by peaceable re-entry [entering when the premises are empty and changing the locks to recover possession];
• sue for the rent;
• apply to the Court for a forfeiture Order or
• wind the company up.

In the case of the last three a landlord is permitted to apply to the Court for permission to take those steps.

Unfortunately, it is rare for a company to come out of Administration and continue trading. The more common scenario is that the Administrators sell the viable assets or parts of the company (often on a pre-pack basis) leaving the unsecured creditors to make claims in the eventual liquidation.

There is a vast array of types of insolvency and a Landlord’s remedy often depends on the type of insolvency that applies. It can be something of a minefield, particularly if there are sub tenants in place; so, taking legal advice before making a decision is important.

In almost all types, if a Landlord has a guarantor for the rent there is the right to pursue them for the arrears. Similarly, if the previous tenant is still on the hook under an AGA (Authorised Guarantee Agreement which places an obligation on the outgoing tenant to guarantee the performance of the new tenant as part of the assignment process).

A Landlord can call on the Rent Deposit Deed in most cases of a tenant insolvency, but the terms of the Deed need to be checked before doing so. Calling on the rent deposit can in certain situations amount to a waiver of the right to forfeit the lease.

If an Administrator wants to continue to use the premises for the benefit of the business, then whilst they are doing so, they must pay the Landlord rent. This will be an expense of the Administration rather than one of the debts of the company.  An Administrator has no right to disclaim the Lease [i.e., declare it onerous property and consequently avoid obligations to pay rent].

Only a Liquidator has disclaimer rights, which means that once disclaimed no further rent is payable even if the Liquidator is in possession of the premises or trying to sell the Lease.  If a Landlord wants the property back following a disclaimer, they are entitled to recover possession. A Landlord can force a decision on a Liquidator by serving Notice. The Liquidator has 28 days to disclaim upon receipt of a Notice and if they don’t, the right to disclaim ends.

If the Liquidator does not disclaim, then the rent will continue to accrue as an expense of the Liquidation and must be paid to the Landlord.

Herrington Carmichael LLP has a specialist team of Dispute Resolution lawyers with many years’ experience in dealing with disputes. If you would like to know more, please contact frankie.tierney@herrington-carmichael.com or call 01276 854 917