With commentators predicting that the real impact of last summer’s credit crunch on corporate liquidations has yet to be felt, how can landlords and tenants of commercial properties prepare for a potential rise in the number of corporate insolvencies?
LANDLORDS’ REMEDIES - THINK OUTSIDE THE BOX
The landlord of a commercial property faced with an insolvent tenant will usually have two concerns:
- In the short term - dealing with any rent arrears that have accrued.
- In the medium to long term - dealing with the property, which may include taking back possession.
The landlord has several ways of dealing with tenant arrears. Typically these will include distress and court proceedings, depending on the particular insolvency regime the tenant is subject to. However, a landlord cannot distrain for rent or issue proceedings against a tenant in administration, without permission of the court or consent of the administrator. With major changes looming in respect of distress, landlords will find their options even more restricted.
Guarantors, rent deposits and previous tenants are all potential sources of payment if the insolvent tenant cannot pay. Now, more than ever, landlords should, when negotiating the terms of a new letting, consider asking the tenant to provide a rent deposit or guarantor. Where the lease permits the landlord to do so, an authorised guarantee agreement should always be requested if a tenant applies for consent to assign. Having a third party on the hook can be especially useful in cases of administration, Individual Voluntary Arrangements (IVAs) and Company Voluntary Arrangements (CVAs), where the landlord may be restricted as to the action it can take against the tenant.
In the medium to long term, a landlord with an insolvent tenant may wish take back possession of the property by forfeiting the lease. However, a landlord with a tenant in administration will need the permission of the court or consent of the administrator before it can forfeit the lease. In a situation where forfeiture is not a viable option the landlord could consider without prejudice negotiations for a surrender of the lease, or (where there is sufficient interest in the property) an assignment.
In a slow market, landlords should consider whether taking back possession of a property is advisable, due to the risk of being left with a void. Void rates can be onerous, and forthcoming changes to the law in April 2008 will make them more so. Instead, the landlord could consider entering into a voluntary arrangement with the tenant. Although the landlord may lose its rental stream in the short term, such an arrangement may prove worthwhile in respect of a reliable tenant.
TENANTS - ACT EARLY
A tenant who finds itself unable to meet its liabilities should consider entering into an IVA or CVA with its creditors, including its landlord. The Insolvency Act 1986 makes provision for such arrangements. A binding voluntary arrangement can provide a tenant with breathing space to try to avoid a more serious outcome such as liquidation or bankruptcy.
An advantage of voluntary arrangements is that, in some cases, there will be a moratorium (a period of time during which no legal proceedings can be brought against the debtor’s property without leave of the court). A moratorium will be automatic in the case of an IVA. In the case of a CVA, small and medium sized companies may be eligible for a moratorium. For larger companies it may be worthwhile making an application for an administration order, which would create an automatic moratorium alongside any CVA.
A tenant could also consider entering into an informal arrangement with its creditors, including its landlord, which may include a moratorium, without engaging these formal procedures.
Overall, the message to tenants is to act early. The purpose of voluntary arrangements and administration is to help companies or individuals facing insolvency. In a weak market a landlord may be prepared to enter into an arrangement with a tenant in difficulties rather than face the prospect of re-letting or being left with a void. Also, a landlord is likely to be more co-operative if a tenant acts quickly. A landlord who has already had to take steps to enforce payment may be less willing to come to an arrangement with a tenant.
ADMINISTRATION - WATCH THIS SPACE
The Enterprise Act 2002 introduced significant changes to administration. These changes have probably tipped the balance of power in favour of tenants. Administrators have a great deal of power and, particularly in the early stages of an administration, a landlord can find itself in a position where it can take little, if any, action against a defaulting tenant. There has been little post Enterprise Act case law on what exactly a landlord can or cannot do while a moratorium is in place. At present, taking any action under a lease requires the consent of the administrator or permission of the court. With the number of companies going into administration set to rise and a possible increase in the occurrence of voluntary arrangements, it may be that landlords will be increasingly challenging administrators’ powers, the terms of CVAs and IVAs and trying to push the boundaries when it comes to taking action against a tenant in administration.