Cheap credit and a benevolent economy have meant that the past five years have been one of the quietest periods for corporate insolvencies. But as customer spending sinks and the credit markets crunch, the trickle over effect could result in a surge of commercial tenants going under. This is not good news for landlords who have been enjoying the upside UK's property driven economy. Understandably the prosperous past has dimmed landlords' recollection of their rights in a tenant's insolvency, it is therefore important for them to revisit where they stand and what their options in the worst-case scenario.
As a starting point you need to understand what insolvency regime regulates the tenant's insolvency. For corporate tenants the two main regimes are administration and liquidation. Receivership is still competent in certain cases but in my experience is becoming much less common. It is easy for those unfamiliar with insolvency to confuse the various insolvency regimes and assume that the terms receivership, administration and liquidation can be used interchangeably: but there important differences.
In administration the aim is to rescue the company if that is possible. To help the administrator to achieve that, the legislation suspends some of the normal rights available to creditors to enable the administrator to be able to pull together a rescue plan for the business. For landlords this means that the normal right of irritancy/forfeiture where the rent is not being paid will not be available. But that doesn't mean that nothing can be done. It is important for a landlord to look to open up an early dialogue with the administrator. The landlord needs to understand what the administrator's plans are and how key your premises are to those plans. Does the administrator want to continue to occupy the premises to allow the business to be marketed as a going concern? Does the administrator simply want to continue to occupy to allow work in progress to be completed or to allow a closing down sale to be held? The landlord will want an agreement in place with the administrator covering the period of his occupation and agreeing that he will meet the rent and service charges for that period. Is there a prospect that the company can be sold as a going concern and if so is the purchaser likely to want to take on the lease or move the business to its own premises elsewhere? If the purchaser is not interested in taking on the premises and the landlord is going to have to look to relet then you will want to come to some arrangement to allow prospective tenants access to the property.
In a liquidation there is little prospect that the liquidator will be able to sell the premises. It is more likely that the premises will be emptied as soon as the assets can be moved to an auction site. Remember that if there are particularly large items of machinery or plant it may take time for these to be disassembled.
Beyond taking a rental deposit or some form of guarantee at the outset of the lease, there is little that can be done to protect a landlord from the insolvency of the tenant. Prevention is always better than cure so trying to take action at the outset is the best course of action. For landlords who have already granted a lease and have not taken a deposit or guarantee it would be sensible to keep a close eye on matters and be alive to early signs of trouble ahead. Knowing your tenant and their patterns of behaviour will help to flag up the unusual. Many tenants may be concerned about their ability to meet the rent going forward if their other overheads, such as fuel, are increasing and their sales are falling. Depending on the type and location of the premises, landlords may be willing to agree to a lower rent than run the risk of premises sitting empty following insolvency. Tenants are unlikely to want to initiate discussions to renegotiate the lease terms unless they are taking professional advice so it might be worth the landlord or their agent looking for the opportunity (a missed payment or rent being paid by a third party) to open those negotiations themselves.
Landlords should also be aware that they have security right over the moveable assets on the premises belonging the tenant, known as Landlord's Hypothec. Until recently, it could only be enforced using expensive court processes and was rarely useful to the landlord in an insolvency situation. However, following recent changes to the law, the security will now automatically 'crystallise' on insolvency, entitling the landlord to a priority claim over the sale proceeds of any moveable assets on the premises, which belonged to the tenant. Whilst this puts the landlord in a better position than the other creditors, it will be for the landlord to make the claim. Early contact should therefore be made with the appointed insolvency practitioner and details sought of the stock/assets on the premises. In a case where the business is sold as a going concern, thought will require to be given as to how the total purchase price is to be allocated between the lease, the moveable property, goodwill and so on.
Getting the right advice at the earliest opportunity can assist landlords to manage the difficult situation of a tenant' s insolvency.
Paul Hally is a partner specialising in corporate law at leading UK law firm Shepherd and Wedderburn LLP.