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A landlord’s guide to dealing with an insolvent tenant – Part 2: Where a tenant is an individual

Where a tenant is an individual and it fails to pay the rent due under a lease a landlord may:

  • Exercise commercial rent arrears recovery (CRAR) for the rent against certain goods of the tenant at the premises.
  • Sue for the rent by court action.
  • Forfeit the lease, either by court action or by peaceable re-entry (modern leases will nearly always have an express forfeiture provision).

These remedies may though be affected by the Insolvency Act 1986.

In the case of an insolvent tenant who is an individual the most common insolvency procedures that apply will be an Individual Voluntary Arrangement or Bankruptcy.

Effect of Individual Voluntary Arrangement (IVA) on Landlord’s remedies

In part 1 of this series the effect of a company voluntary arrangement on the landlord’s remedies was considered. The purpose of an IVA is similar to that of a CVA namely to allow the insolvent to come to an agreement with the creditors as to how the debt owed can be paid both in terms of a reduced figure and time to pay. An IVA is supervised by an insolvency practitioner who acts as Supervisor. An individual may apply for an interim order at court which will create a moratorium prior to the IVA being voted upon. If an interim order has been granted then the leave of court is required before the landlord can exercise CRAR. Once the IVA is in place the right of the landlord to exercise CRAR will then depend on the terms of the IVA. During the interim order the court may stay any action for recovery of rent and if the action has not yet been commenced the landlord will require the leave of court before such action can be taken to recover arrears of rent.

In relation to forfeiture the position is much same as it is with suing for unpaid rent. The making of an application for an interim order will enable the proceedings to be stayed and the granting of the interim order itself will mean that forfeiture by peaceable re-entry can only be undertaken with the leave of the court.

As with a CVA and IVA requires 75% of creditors in value who vote to vote in favour of the proposal and it will then be binding on all creditors no matter how they voted. The landlord will therefore be bound by the terms of the IVA.

Effect of Bankruptcy on Landlord’s remedies

Since 6 April 2016 bankruptcy proceedings commence with either the presentation of a bankruptcy petition by a creditor of the individual or by a debtor making an online application to the adjudicator.

Once the individual has been declared bankrupt a trustee in bankruptcy will be appointed. The property of the individual made bankrupt will automatically vest in the trustee in bankruptcy upon their appointment taking effect. Even though the lease will have vested in the trustee in bankruptcy this will not be a breach of any tenant covenant not to assign without the landlord’s consent.

Following the presentation of a bankruptcy petition or the debtor’s online application the court has the power to stay any action, execution or other legal process against the property or person of the debtor. Exercising CRAR is not an action, execution or legal process within the definition set out in the Insolvency Act. However, it should be noted that once the bankruptcy order is made there are provisions within the Insolvency Act which will allow for CRAR to be effectively undone. Furthermore, whilst the bankruptcy is pending any action commenced by the landlord to sue for rent due and unpaid can be stayed despite the fact that the landlord can commence such action without the leave of court. Likewise, a landlord can forfeit by court action without the leave court but will risk having the action stayed. The position regarding forfeiture by peaceable re-entry though is not entirely clear.

The position regarding exercising CRAR after the bankruptcy order has been made is that it is a remedy within section 285 Insolvency Act 1986 but the prohibition on remedies is expressly subject to the rights to exercise CRAR as set out in section 347 Insolvency Act 1986. Section 347 allows the landlord to exercise CRAR for up to six months’ rent that accrued due before the bankruptcy order. The landlord generally has to complete the process before the bankrupt is discharged. This right however is subject to provisos.

Once a bankruptcy order has been made then the landlord is unable to sue for outstanding rent or to continue with any such proceedings without obtaining the leave of the court.

The landlord of an undischarged bankrupt does not need to obtain the permission of the court in order to forfeit the lease either by peaceable re-entry or by way of a court order. Any rent that falls due after the date of the bankruptcy order is not provable within the bankruptcy and the landlord therefore has the ability to commence forfeiture in relation to such outstanding rent.

Disclaimer

The Insolvency Act 1986 allows a liquidator or a trustee in bankruptcy to disclaim owner’s property. A disclaimer served on the landlord by either a liquidator or trustee in bankruptcy can only be served if the lease in question qualifies as being owner’s property. Notice has to be given by the trustee in bankruptcy, or in the case of a company its Liquidator, to the landlord and any undertenant and mortgagee. And the effect of the disclaimer is that the rights and liabilities of the bankrupt in the property are then brought to an end. The liabilities of 3rd parties such as guarantors continue to exist and be enforceable.

To give the landlord some certainty there is a procedure which allows for the landlord to require the trustee in bankruptcy or liquidator to elect whether they are intending to disclaim the lease. When such notices given to the office holder they then have 28 days in which to disclaim unless they are given further time by the court.

The above guide is not intended to be taken as specific legal advice and a Landlord faced with the prospect of dealing with an insolvent tenant should always take their own legal advice at the earliest opportunity. Many landlords will find that taking specialist insolvency advice will save them time and could result in a better outcome for them. Cognitive Law have solicitors experienced in this area who can give the specialist advice that is required in this area.

Darren Stone

Darren.Stone@cognitivelaw.co.uk