Most Landlords, and Insolvency Practitioners (“IP”s), will be well aware of the issues and liabilities that can arise where a tenant (whether it be a company or individual, residential or commercial) experiences financial difficulties. Competing interests can lead to difficulties for all parties and, potentially, legal disputes.
Increasingly however, those parties that take a pragmatic, conciliatory and helpful approach to these issues find matters are resolved much more quickly and with greater benefit to everyone involved. To that end, it is worth understanding the options available to the other party.
Options available to Landlords prior to the appointment of an Insolvency Practitioner
If a tenant stops paying rent, a landlord usually has the following options:
- Sue for the rent (although this will incur cost and delay);
- Have a sub-tenant pay sub-rent direct to the landlord;
- Call on the rent deposit;
- Pursue a guarantor, or former tenant, if available;
- Forfeit the Lease;
- Where available, exercise the right of Commercial Rent Arrears Recovery, although this will prohibit forfeiture. (The previous right to distrain for rent has been abolished).
However, the appointment of an IP will usually prevent a landlord from exercising many of the above options.
Landlords should be aware that there are several different types of office held by IPs, and that all IPs have a duty to act in the best interest of all the creditors of the insolvent party. Different rules and powers apply to each type of office held by an IP, but their status and duties mean that the usual options available to both landlords and tenants may not remain available.
The most important consideration for a landlord is the fact that the appointment of an IP will usually freeze the liability of the tenant under the Lease, which liabilities only passes to the IP to deal with in priority to the claims of other unsecured creditors, in certain circumstances.
Landlords therefore need to be on the look out for any indication of the tenant encountering financial difficulties, for example where rent is persistently paid late, or requests are made to vary the Lease by, for example, reducing the rent or changing the rent payment date from quarterly to monthly. In such circumstances, the landlord should take advice and always act promptly – whether or not the tenant is actually in arrears.
Alternative Options for Landlords
If an IP has not been appointed, the landlord can opt for one of the options outlined above. However, with the exception of forfeiture, which has its own issues, none of the above will resolve the underlying problem – with the result that the tenant may again fall into arrears.
There are, however, less traditional options available, such as allowing the tenant a “rent holiday”, agreeing a variation (formally, or informally) to the amount of rent and/or payment dates, or negotiating a surrender of the Lease so that the Property can be re-let to another tenant.
In considering these alternative options, a landlord might suggest (or a tenant offer) that an IP be instructed to carry out a review of the tenant’s financial position in order to give the landlord peace of mind as to the merits of altering the Lease as suggested above.
Equally, if an IP has been consulted by the tenant, they need to be aware from the start of the above actions a landlord could take, which would in turn reduce the options available to the tenant, and potentially affect the returns due to creditors if the tenant enters an insolvency process.
We have had success in several recent cases, where both sides acted pragmatically in considering the options available to each other, such as in the case study below.
We were contacted by a landlord when his corporate tenant was two weeks late with the rent, as the landlord had heard rumours that the tenant was in administration. Upon investigating the identity of the tenant, we became aware that the tenant was not in administration, although several other companies within the tenant’s group were. As a result, given that the Lease allowed the tenant to share occupation with Group companies, the landlord’s right to distrain (which would now be a right to exercise commercial rent arrears recovery) was inadvisable and the landlord did not want to incur the risks of forfeiting the Lease. Unfortunately, there was no guarantor or former tenant, no deposit, no sub-tenant, and suing for the rent would be futile, given the likelihood of the tenant entering administration in the near future.
Nevertheless, we approached the administrators of the tenant’s parent company, and discovered that they required ongoing access to the property. However, because the tenant was not in administration itself, the administrators of its parents were not obliged to pay the rent. We therefore explained to the administrators the options that were available to the landlord (even though he was reluctant to take them) and were able to negotiate an arrangement whereby the Administrators agreed to pay rent on a “pay-as-you-go” basis for the period of their use. This ensured that they did not have to incur the time and cost, and particularly access restrictions, of dealing with any action the landlord might have taken. We even managed to persuade the administrators to pay the landlord’s legal costs!
As can be seen from the above case study, Landlords and IPs should consider whether a negotiated financial settlement (if there are funds available) might be preferable to drawn out and costly legal proceedings or, worse still, empty premises. Landlords should therefore keep a close eye on the fortunes of their tenants and be willing to take advice and to act quickly to ensure the best outcome.