A common issue facing landlords of commercial premises is to decide what to do if one of its tenants has stopped paying the rent and has entered into one of the types of insolvency prescribed by statute. In the case of companies, these can include company voluntary arrangements, administration, administrative receivership, Law of Property Act receivership or liquidation. In the case of individuals, they might include individual voluntary arrangements or bankruptcy.
In theory, the landlord is in a stronger position than some other creditors because of the extra remedies available to it under the law relating to landlord and tenant. Provided the lease contains standard provisions, a landlord (absent insolvency) would normally be able to forfeit the lease, either by court action or by peaceable re-entry, to distrain for the rent against certain goods of the tenant at the premises or sue for the rent by court action.
In most types of insolvency, the landlord’s ability to take the sort of action set out above is curtailed by the insolvency rules, so that any such action will be stayed or require permission of the court. However, there are some exceptions to this rule, as set out below.
In the case of a winding up (or liquidation), the landlord’s remedies depend upon whether there is a voluntary or compulsory winding up. A voluntary winding up may be either a shareholders’ voluntary winding up or a creditors’ voluntary winding up. In such cases there is no moratorium on the actions of a landlord as such, however, another creditor or the liquidator may apply to the court for an order to restrain any action or proceedings by the landlord. In the case of a compulsory winding up, permission of the court will be needed if a landlord wishes to take enforcement action.
In the case of receivership, which may refer either to an administrative receivership or a receivership under the Law of Property Act 1925, the appointment of a receiver does not affect the landlord’s enforcement remedies, although the landlord may find it has to deal with the receiver rather than the tenant.
Company Voluntary Arrangements (CVAs)
In the case of CVAs, there is a difference between ‘small’ companies and other companies. A small company is one that satisfies two or more of the following criteria: A turnover no greater than £6.5m; balance sheet assets no greater than £3.26m; no more than 50 employees. If a tenant company comes within those criteria, it may file at court for a moratorium preventing enforcement of remedies by the landlord.
In relation to companies not deemed to be small companies, there is no moratorium on landlord action and enforcement remedies depend on the terms of the CVA, the default position being that the landlord may enforce its remedies unless the CVA specifically removes this right.
Individual Voluntary Arrangements (IVAs)
In the case of individuals who have entered into IVAs, the right of the landlord to distrain will depend upon the terms of the particular IVA. However, a landlord will need leave of the court to take court action to recover arrears of rent and/or to forfeit.
In the case of bankruptcy, the landlord may distrain for up to six months rent that has accrued prior to the bankruptcy order being made; however, leave of the court is needed to begin any court proceedings for recovery of the rent. The landlord does not need permission to forfeit the lease.
In summary, if the landlord finds itself with an insolvent tenant who owes rent, there are various options available, albeit in some cases limited ones, depending on the type of insolvency involved.