In an economic climate where company insolvencies have increased by 12 per cent since this time last year, and where one of the fastest growing industries for insolvencies is retail, it has never been more important for landlords to know their rights. One need only look to the high-profile decline and subsequent purchase out of administration of House of Fraser as an illustration of the risks that landlords face. But what should landlords expect when faced with a tenant’s insolvency?
There are a number of procedures under the umbrella of company insolvency, all of which have their own unique elements and restrictions. The most common types are Company Voluntary Arrangements (CVAs), administration and liquidation.
Recently dominating the media, CVAs involve the tenant company seeking to enter into an agreement with some or all of its creditors, to pay its debts in a structured manner and on the particular terms of a CVA contract. Landlords will almost certainly be among those creditors and should be notified of the CVA proposal and be entitled to vote on the terms of the CVA contract. However, they could be outvoted and bound by unfavourable terms agreed by the tenant’s other creditors. Whether they can be outvoted will depend on the other creditors’ shares of the tenant’s debts. For instance, the tenant’s bank may well be a critical creditor with a majority share.
Until the CVA is agreed, landlords can pursue their tenants under the normal remedies contained in the lease. However, once the CVA is agreed and formalised at court, they will then be bound by the terms of the CVA contract and may be restricted in their normal remedies. If aggrieved, landlords can challenge a CVA within 28 days of its approval, on the grounds that they are unfairly prejudiced by it, or that there was a significant irregularity in the legal procedure. If successful, a challenge can see the CVA suspended, revoked or sent back to the tenant’s creditors for reconsideration. Landlords can also still seek to use a lease’s forfeiture clause to end the lease if their tenants are not paying the rent unless the CVA specifically removes their right to do so.
The second option, administration, is a rescue procedure with the primary aim of helping a struggling company get back to successful trading. It is possible to discover whether a tenant company is in administration by carrying out online checks at Companies House or using a premium rate telephone verification service. Once an application to the court has been made for administration or the relevant documents have been filed, landlords are prevented from exercising the forfeiture clause of the lease or from taking any other type of enforcement action under the lease or otherwise. This is the case for the entire period during which the documents are being considered unless the landlord obtains the consent of the court.
Landlords are also prevented from taking action during the period of the administration unless they have the leave of the court or the consent of the administrator. The period of an administration typically lasts for 12 months, although it can be extended. Sometimes a company will seek administration to give itself breathing room to negotiate the terms of a CVA, without the looming risk of action by creditors. However, whilst a tenant is occupying and taking the benefit of a leased property, rental payments should still be made as an expense of the administration and there is no power on the part of the administrator to give up the tenant’s liability to pay this.
Thirdly, liquidation, commonly known as ‘winding up’, is a procedure with the primary aim of realising the tenant company’s assets to generate the funds necessary to pay off creditors. A tenant may voluntarily wind up by passing a resolution to do so. It is usually possible to find out about this at Companies House as a copy of the resolution must be sent to them within 15 days of it being passed. Landlords may still exercise their normal lease remedies, although it is possible that the tenant or its liquidator could apply to the court to prevent action against the tenant.
If the liquidator of the tenant continues to use and benefit from the leased property, then the rent during this period, as with an administration, is likely to be a necessary expense of the liquidation, paid in advance of other creditors’ claims. In contrast to administration, where there is no power on the part of an administrator to disclaim a lease, there is an added risk to landlords that the liquidator can, by disclaimer, give up the tenant’s liability under the lease. This will restrict the landlord from making an unsecured claim in the liquidation for the residue of the lease, usually with little prospect of any recovery.
Alternatively, a tenant company can be wound up by court order, following the successful petition of a creditor. To find out whether a petition has been presented, landlords can carry out the same searches as those made for administrations. Whilst the creditor’s petition for a court order is awaiting a hearing date, landlords can attempt to exercise their normal remedies.
Once the court order has been made, landlords will need the consent of the court to take enforcement action against the tenant. In this case, similarly to voluntary winding up, the liquidator may give up a tenant’s liability under the lease by disclaimer. Landlords can write to the liquidator asking them to decide to give up the lease or not and the liquidator then has 28 days in which to make the decision. If the lease is given up by the liquidator, landlords may still be able to pursue their former tenants or their guarantor. They may also be able to seek the payment of rent from any subtenants if the property has been subleased. This will depend on the terms of the leases.
A landlord’s position can be precarious when a tenant is involved in company insolvency procedures. Therefore they must consider the options available to them carefully, in order to retain and maximise as much benefit from the property as possible.
Ben Darlow is a solicitor in the commercial property team and Sean Moran is a partner in the restructuring and insolvency team at law firm Shakespeare Martineau.