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

Where a tenant is a company 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 commercial tenant the most common insolvency regimes that will apply are a Company Voluntary Arrangement (CVA), Administration, LPA Receivership, Creditors’ Voluntary Liquidation or a Compulsory Liquidation.

Effect of Company Voluntary Arrangement (CVA) on Landlord’s remedies

A CVA is essentially an arrangement entered into between the company and its creditors that settles the debts of the company to those creditors on terms were have been agreed. The CVA will be voted upon by the company creditors and requires 75% of creditors in value who vote to vote in favour of the arrangement. The arrangement then binds all creditors no matter how they voted.

The CVA is supervised by an insolvency practitioner and unlike a Liquidator the Supervisor cannot disclaim the lease. The CVA can make provision for payments due in the future from the company and can contain terms which may release former tenants or guarantors of the tenant from liability under the lease.

Once in place a CVA prevents the landlord from exercising CRAR, suing for rent or forfeiting the lease. If the tenant breaches any of its obligations after the date of the CVA then the landlord is free to enforce against the company for any post CVA breaches of the lease.

Effect of Administration on Landlord’s remedies

When a company enters into administration it can do so by way of an application to court or through an out of court procedure. Once the out of court procedure has been commenced an interim moratorium is created, and once the company is in administration there is a moratorium that will prevent the landlord from exercising CRAR, forfeiting the lease, beginning or continuing with any court proceedings, or taking any step to enforce its security. The landlord may only proceed with any of the steps outlined if it has the permission of the court or the consent of the Administrator.

The Administrator cannot disclaim the lease and if the company retains the premises for the benefit of creditors during the course of the administration the Administrator must pay rent for the whole period of that occupation as an expense of the administration. Whilst the premises are occupied rent liability is accrued on a day-to-day basis.

Effect of Receivership on Landlord’s remedies

Receivership may be in the form of an LPA receiver or an Administrative Receiver. An Administrative Receiver is appointed by a charge holder in relation to the whole, or substantially the whole of the company’s assets provided that the floating charge was created before 15 September 2003, otherwise there are limitations as to when an Administrative Receiver can be appointed.

The appointment of an Administrative Receiver does not affect the landlord’s right to exercise CRAR, sue for rent, or to forfeit the lease. Any of these actions can be taken without the permission of the court or the consent of the Administrative Receiver. When an Administrative Receiver has been appointed the landlord will need to deal with the Administrative Receiver rather than the directors of the company. An Administrative Receiver has no power to disclaim the lease.

LPA receivers are appointed by the holder of a fixed charge over the property. Their powers come from the Law of Property Act 1925 and from the express terms of the charge.

The appointment of an LPA Receiver does not affect the landlord’s right to exercise CRAR, Sue for rent, or to forfeit the lease. Any of these actions can be taken without the permission of the court or the consent of the Administrative Receiver. When an Administrative Receiver has been appointed the landlord will need to deal with the Administrative Receiver rather than the directors of the company. An Administrative Receiver has no power to disclaim the lease.

Effect of Creditors’ Voluntary Liquidation (CVL) on Landlord’s remedies

There are two types of voluntary liquidation, a members Voluntary Liquidation which will apply when the company is solvent and therefore able to pay its debts and a creditors voluntary liquidation which will apply when the company is no longer able to pay its debts.

When a company’s been placed into a CVL a landlord can still exercise CRAR, Sue for rent or forfeit the lease without the leave of the court. However, the Insolvency Act does enable another creditor, the Liquidator or a contributory to apply to court to restrain any action or proceedings. By definition actions and proceedings include court actions for non-payment of rent and court actions for forfeiture. It is also arguable that forfeiture by peaceable re-entry is also to be regarded as an action or proceeding. As with compulsory liquidation the continued use of premises by a Liquidator can result in the current rent becoming an expense of the liquidation payable in priority to certain other creditors.

Effect of Compulsory Liquidation on Landlord’s remedies

This type of liquidation is initiated by a creditor petitioning the court for the liquidation of the company on the basis that the company is unable to pay its debts. The process begins with a petition being presented to the court, the petition is then served on the company and subsequently advertised in the London Gazette. The petition is then heard by the court who can then make an order winding up the company.

The company continues in existence until the Liquidator has completed the gathering of assets and distribution to creditors. During the process of liquidation, the company continues to exist and is liable for rent until the company is dissolved. The property of the company remains vested in the company until it is disposed of by the Liquidator and the Liquidator acts as agent of the company. The Liquidator also has a power to disclaim the lease if it regarded as onerous property.

The landlord can sue for rent owed in the period between the presentation of the petition and the making of the order to recover the arrears of rent without the leave of the court. However, the Insolvency Act does allow another creditor or the company or contributory to apply to have the action stayed. Once a winding up order has been made leave of the court is then required to commence or continue with any action to recover arrears of rent. CRAR may not be commenced after the petition has been presented and may only be continued with if the Court gives its permission. In relation to forfeiture by court action the same provisions of the Insolvency Act apply as they do to suing for arrears of rent. Any action can be stayed before the order winding up the company is made and after the order has been made leave is then required to continue commence the court action for forfeiture. In the case of forfeiture by peaceable re-entry the situation is broadly the same as above although strictly speaking the legal situation is not so clear.

It should also be remembered that after the liquidation has commenced and the Liquidator has been appointed the current rent can be claimed as an expense of the liquidation and if such a claim is successful it will rank ahead of the claims of other creditors such as those with floating charges or unsecured creditors.

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 then 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