Unfortunately, we’re seeing many household names declare that they’re entering administration, liquidated, or on the brink of it, leaving behind a trail of empty stores and warehouses. For Landlords, now is an important time as any to identify and assess what options may be available to you if your Tenant is formally insolvent or heading in that direction.
If the corporate Tenant fails to pay rent due under the lease:
- The Landlord should first check the lease and, in particular, the forfeiture clause. The Landlord may be able to forfeit the lease (subject to any grace periods).
- Is there a rent deposit that the Landlord could draw-down from? If there is a separate rent deposit deed, the Landlord should review it and determine (a) how the deposit is held (is the deposit secured as a charge or held on trust for the tenant), and (b) ensure it complies with its terms (some rent deposit deeds requires prior notice to be served on the Tenant before the Landlord makes a withdrawal).
- The Landlord may want to consider giving a ‘rent concession’ to the tenant, for example, giving the Tenant the temporary ability to pay monthly rather than quarterly or give the Tenant a rent reduction. The Landlord will need to tread carefully on this so as not to prejudice enforcing any other rights that it may have available to it.
- Is there a separate (and solvent) Guarantor? The Landlord may want to explore the possibility of claiming against the Guarantor for the sums owed. If so, the guarantee provisions contained in the lease / separate guarantee will need to be reviewed to check for any limitations.
- If the Tenant has already entered administration, a Landlord will need to jump a few hurdles if it wants to forfeit the lease so forfeiture may not be an immediate option. The Landlord should investigate the administrator’s intention for the property – does the administrator want to continue using the property (in which case, the administrator should pay rent), assign the lease, or propose that a new lease is entered into with the buyer of the company (if they’ve managed to find one).
- If the Tenant is in the process of liquidation, the liquidator may choose to disclaim the lease and until then, rent will still accrue but will be treated as an unsecured debt (which puts the Landlord down the pecking order of pay-outs). If the property is used for the purposes of administering the liquidation, the accrued rent can be claimed as an expense of the liquidation which is paid out before any unsecured debts. If the property is not used, the Landlord may want to secure the property but care should be taken before doing this (and notice served on the interested parties) so that it’s not deemed to be an act of forfeiture.
Practically, a Landlord should keep a close eye on its Tenant and the property for some indicators – is the property in good repair, does the Tenant keep the property secure, is the Tenant continuing to pay the rent on time, is the rent coming from another source, has anything been mentioned about the Tenant in the press?
All of the above is a brief overview and every case will need to turn on its facts. Of course, emergency legislation (specific to Covid-19) may have an impact on the Landlord’s rights and remedies. The impact of such legislation has not been considered in this article.
For further information or advice regarding an insolvent commercial tenant, contact commercial property solicitor, Raj Hundal, on 0116 402 7249 or email email@example.com.