Landlords’ Options For Dealing With Insolvent Tenants

For landlords, insolvent tenants can be a huge problem. Not only are they likely to be unable to pay their rent, but the time and cost involved in removing tenants from a property can add additional frustration and expense.

If a tenant fails to pay their rent then the landlord will usually have a number of options including:

• Drawing on any tenant deposit
• Diverting rent from any sub-tenant
• Claiming the arrears from any guarantor (or in some circumstances, a former tenant).

If the landlord is unable to obtain the rent in any of those ways, it may be necessary that it takes formal action in which case its options will be:

• Forfeiting the lease; no prior notice or court action is required provided no part of the premises is used for residential purposes
• Suing the tenant; unlike forfeiture this process will leave the lease in place, the landlord will instead seek a court judgment which can then be enforced
• Commercial Rent Arrears Recovery; this involves seizure of the tenant’s good, it leaves the lease in place and avoids the need for court action.

It is however critical to note that in cases of tenant insolvency, there may be restrictions on the formal action which a landlord is able to take. It is therefore important to understand the different insolvency regimes so as to know both what restrictions apply but also what advantages and disadvantages they offer. This can give you a clearer picture of what action you may need to take and the potential outcomes.

Company Voluntary Arrangement (CVA)

Sometimes, insolvent tenants will seek to enter into a  Company Voluntary Arrangement or ‘CVA’. This is a legally binding agreement entered into by a company and its unsecured creditors, including landlords. A CVA will set out terms for the company to repay some or all of its debts over an agreed time period. The aim is to give the company a realistic chance of paying its debts with a view to continuing trading.

Creditors will have the chance to vote on whether to accept a CVA at a creditors’ meeting. An agreement will be needed from creditors holding at least 75% of the business’s debt in order for the CVA to be granted.

Controversially, CVA proposals can include different proposals for different types of creditor. This has been used by some tenants to obtain rent reductions or offload onerous leases, while keeping more profitable locations and paying suppliers in full. This sort of cherry-picking is infuriating for landlords affected, particularly if other creditors are  unaffected and therefore vote in favour. While they can sometimes be challenged in court, that is often difficult in practice.

On the other hand, CVAs are not all bad news for landlords. Some leases may not be affected at all, or see only slight alterations. Even if they provide for reduced rent,  that may be better than other alternative insolvency processes, as they are often coupled with the introduction of new money into the troubled company. If a tenant sticks to the terms of a CVA, this means a landlord will receive payment of at least part of their debt and will not have to spend time and money on debt recovery and enforcement proceedings. It can, therefore, be the quickest, most cost-effective option for dealing with an insolvent tenant, depending on the circumstances.

Administration

Administration is a procedure that financially distressed companies can enter into to give them “breathing room” to reorganise and find a way to save their business. When a company enters administration, a moratorium will be put in place, preventing creditors’ from enforcing any claim they have against the business. The landlord will also not have the right to forfeit the lease for non-payment of rent without the consent of the administrator or permission from a Court.

If a company is placed into administration, it will still be liable to pay rent and other costs specified in its lease on any premises still being used for business purposes. This rent will be calculated at a daily rate for the period of the administration during which the business still uses the property in question. This will be paid as a cost of administration, so in priority to other creditors.

Administrators cannot disclaim a lease. However, administrators are not required to pay a landlord any rent arrears or other debts owed by the business that accrued before the company was placed into administration. They also do not have to pay any rent going forward, if they do not want to use the property any longer. In that case, landlords have little choice but to accept a surrender of the lease, as otherwise the rent arrears will simply continue to accrue. The landlord will then be free to install new tenants. A  landlord owed rent arrears of other debts by a tenant in administration will need to make a claim to the administrators for the amount owed. They will have the right to a pro rata dividend from any assets of the company in administration, but that will often result in very little being recovered.

Sometimes administrators will be interested in assigning a lease as part of a business sale; this may even have been negotiated before entering administration (a ‘pre-pack’ administration). In that case the landlord will be in a stronger position.

Creditors’ Voluntary Liquidation (CVL)

An insolvent company can choose to enter liquidation if it cannot realistically continue trading. This is known as a Creditors Voluntary Liquidation or ‘CVL’.  A liquidator will be appointed to realise the company’s assets and use the proceeds to repay as much as possible to its creditors..

If a tenant enters into a Creditors Voluntary Liquidation, you will still be able to take action to recover unpaid rent and may be able to forfeit the lease. However, the liquidator can apply to the Court to attempt to prevent this, which could potentially complicate matters.

If the liquidator continues to use the premises in question for the purposes of the liquidation, the landlord will be entitled to a day-rate for the use of the building. However, this is very rare. If the lease has a capital value, the liquidator will look to assign it. In other cases, the liquidator will normally disclaim the lease, allowing the landlord to put new tenants into occupation.

Where the tenant has granted security over the lease to a creditor, or where there are subtenants, their position will also need to be taken into account. This is likely to complicate the position further.

As for rent arrears and other claims against a tenant, the  liquidator will sell the company’s assets and distribute any proceeds left over to the creditors, pro rata. The business’s landlord will need to register as a creditor, providing proof of the debt owed. However, unless the lease can be assigned, it is unlikely the landlord will recover more than a small proportion of the debt.

Compulsory liquidation

An insolvent company can be forced into liquidation if one or more of its creditors submits a winding up petition to the Court. In some cases, landlords can submit winding up petitions. If the petition is granted, a winding up order is made. A liquidator will then be appointed.

While this is a different method for a company to enter liquidation, the position for a landlord owed money by an insolvent tenant is similar. The main difference is in relation to the landlord’s rights to forfeiture and other forms of enforcement, as the landlord will need the court’s permission to take such action in the event a winding up order has been made.

Here to Help

Insolvency is a highly complex area of law, with strict processes to follow, so creditors should always seek expert legal advice at the earliest opportunity. This can significantly increase your chances of securing a positive outcome.

Longmores is particularly well positioned to advise landlords on their options for dealing with insolvent tenants as we can draw on expertise in commercial property, property litigation and insolvency. We can therefore make sure that all angles are considered and that you can make the right strategic choice for your concerns.

To discuss how we can help landlords deal with insolvent tenants, please contact  Nat Young who specialises in Insolvency and Dispute Resolution or John Wagstaffe, Partner and Head of Property Litigation, who will be happy to advise.