Landlords facing tenant insolvency

Landlords facing tenant insolvency

In these current times of financial difficulty many landlords are faced with tenants becoming insolvent.  There are a number of options available to a landlord if a tenant is facing financial difficulty or insolvency. 

This briefing examines the remedies available to a landlord for recovering rent arrears while the tenant is solvent and the remedies available should the tenant become insolvent.

Options available to a landlord while the tenant remains solvent

If there are concerns over a tenant’s solvency the landlord should consider what remedies are available to it as soon as possible, because once insolvency has occurred certain remedies will only be available to the landlord with the consent of the insolvency practitioner or the courts.

Forfeiture

A landlord may elect to forfeit the lease; this will bring the lease to an end either by peaceful re-entry or through court proceedings.  Peaceful re-entry is often quicker and easier and arguably can be more effective than commencing court proceedings.  The landlord may chose to forfeit the lease if it wishes to recover possession of the property, although as forfeiture brings the lease to an end the landlord may wish to consider the ability to re-let the premises, particularly in the current financially difficult times and in view of the liability to pay business rates.  This remedy should be considered as soon as a tenant is in arrears, as the use of other remedies will risk waiving the right to forfeit. 

Distress

This common law remedy allows the landlord to seize goods from the leasehold premises and sell them to raise funds to cover arrears due on the property.  The effectiveness of this remedy relies on the tenant having goods on the premises to make the attendance of a bailiff worthwhile.  As a tactical exercise bailiffs are often instructed to attend the premises at busy times to cause maximum embarrassment to the tenant.

Court Proceedings

A landlord can claim against a tenant to recover the rent arrears.  This can be a costly and time consuming remedy and even if successful the landlord then faces the issue of meaningful enforcement on assets of the tenant.

Diversion of under-tenants’ rent

If the premises have been let to an under-tenant the superior landlord can require in certain circumstances the under-tenant to pay rent directly to it.

Options available to the landlord if the tenant becomes insolvent

Administration

A tenant may enter administration to reorganise the company and release its assets under the protection of a statutory moratorium.  As there is a moratorium on enforcement action the additional remedies available to the landlord are limited.  A landlord with a tenant in administration will not be able to forfeit the lease, exercise distress for arrears, or issue court proceedings against the tenant without first obtaining the administrator’s consent or the court’s permission.

Liquidation

Liquidation allows for the realisation of a tenant company's assets, the settlement of its liabilities and its subsequent dissolution.  There are two types of liquidation: voluntary liquidation and compulsory liquidation.  If the tenant is in voluntary liquidation the landlord will have more remedies available to it than if the tenant is in compulsory liquidation.  If the tenant is in voluntary liquidation, the landlord may still exercise and issue court proceedings to recover the rent arrears.  However if the tenant is in compulsory liquidation the landlord can not start court proceedings without the consent of the liquidator or the permission of the court.

Company Voluntary Arrangements (CVA)

This is an arrangement between the insolvent tenant and its creditors that settles the debts of the company to those creditors.  The company continues to exist and its property remains vested in it.  A landlord is bound by the terms of the CVA.  The landlord should be aware that if a tenant is a small company the tenant may file for a CVA moratorium; this moratorium will limit the landlord’s right to pursue its remedies.  If a tenant exercises a small company moratorium the landlord can not forfeit the lease or exercise distress to recover rent arrears.

Receivership

This covers both administrative receivership and receivership under the Law of Property Act.  Aimed at allowing the continuance of the relevant business, positively for the landlord it will have all remedies for recovering rent arrears still available to them.

In conclusion if a landlord finds itself with an insolvent tenant there are a number of options available to it.  The most important message to a landlord is to remain diligent, watch for early signs of a tenant becoming insolvent and act quickly if a landlord suspects a tenant may be facing insolvency.  

For further advice if you have a tenant at risk of or in insolvency please contact Martin Smith at martinsmith@hewitsons.com.