The continuing harsh economic conditions see more and more businesses going into examinership. Examinership has serious implications for landlords.
A significant number of companies, high profile and otherwise, have entered into examinership in recent years. In many cases leases with inflated rents, negotiated prior to the economic downturn, have been cited as one of the main reasons that these companies have had to enter into the examinership process. These leases, normally for a significant term of years, also often carry onerous covenants with regard to repair, have limited break opportunities and are subject to regular and upwards only rent reviews. For the landlord of a tenant that has gone into the examinership, there is understandable uncertainty about what this means for their lease.
What is an Examinership?
Examinership allows companies that are experiencing financial difficulties to seek the protection of the court from their creditors for a limited period of time of up to 100 days. If an examiner is appointed he or she is appointed by the court to restructure the company's debt and achieve an injection of new capital so that, when the restructured and newly-capitalised business comes out of the protection of the court, it can continue to trade profitably.
At the conclusion of the examinership, the examiner formulates a scheme of arrangement, essentially a plan to save the company, which is put to the company's creditors for their approval. This is a proposal relating to how the existing debts are to be paid and generally involves the creditors agreeing to accept a discount on the debt owed to them. If the requisite number of creditors agree to the scheme, the scheme is brought before the court for its approval.
Leases in an Examinership
The appointment of an examiner does not alter the effect of a pre-existing contract such as a lease, and it remains binding on the company. Any rent outstanding before the appointment of the examiner is classed as an unsecured debt in the examinership. Accordingly, this rent will form part of any scheme of arrangement and will be discounted in accordance with the percentage dividend which is provided for landlord creditors in the approved scheme.
Rent incurred during the period of examinership may be certified by the examiner as an expense of the examinership. This essentially means that it can be paid in full. However, it is imperative that if an examiner is appointed over a tenant company, the landlord immediately contacts the examiner and obtains confirmation that the rent will be paid in full during the course of the examinership. The courts have held that if, at the end of an examinership period, a landlord only then seeks the payment of rent that accrued during the examinership, the examiner is not obliged to certify the rent as an expense. Instead, that rent may be deemed an unsecured debt and will then form part of any scheme of arrangement. This means that the landlord will recover only that portion of the rent provided for under the scheme.
If, as part of the scheme, it is intended that the tenant company continues to lease the premises, the scheme cannot seek to change the terms of the lease without the landlord's agreement. On the other hand, if it is decided that following fresh investment the company no longer requires the use of the premises, it must assign the lease to a third party or alternatively surrender the lease back to the landlord, although the landlord is entitled to seek compensation for the surrender.
Often the landlord will have obtained the benefit of a personal guarantee from a director of the tenant company or from a third party. If the landlord wishes to have the option of enforcing this guarantee, then upon receipt of notification from the examiner of the meeting of creditors to vote on a scheme of arrangement, the landlord must offer, in writing and within a set notice period, to transfer to the guarantor all voting rights available to the landlord at the meeting to approve the scheme of arrangement. If this written offer is not made by the landlord, the guarantee will fall away and the landlord will not be able to enforce, by legal proceedings or otherwise, the terms of the guarantee unless either:
- the scheme of arrangement is not entered into or does not take effect; or
- the landlord subsequently obtains leave of the court to enforce the guarantee.
Repudiation of a lease
Where the examiner believes that the terms of a lease are onerous and a variation of the terms or surrender of the lease cannot be agreed, the company can make an application to the court to repudiate the lease.
The decision as to whether the company can repudiate a lease is at the discretion of the Courts. In reaching its decision the Court will take into account a number of matters such as the terms of the proposed investor into the company, whether the terms of the lease are onerous, the approach taken by both the company and the landlord in any negotiation regarding the terms of the lease and the saving of the enterprise and jobs. The repudiation of a lease is something that the Court will only permit in exceptional circumstances as it is viewed as a significant interference with the landlord's property rights.
A landlord has a right of audience in the Court and can make objections to the application for repudiation. If the landlord's application to avoid the lease being repudiated is unsuccessful the landlord can apply for compensation for loss of contract. However, this will form part of any subsequent scheme of arrangement and realistically will be significantly impaired.
In summary, if the tenant company becomes insolvent and is placed into examinership, the landlord should immediately seek to ensure that any rent incurred during the period of examinership is certified by the examiner as an expense of the examination process. This will ensure that it is paid and does not become part of any scheme of arrangement.
Landlords should also be realistic if approached by an examiner with a view to renegotiating the terms of the lease. Indeed, if a tenant company is falling into arrears of rent, it may be advisable that the landlord should take pre-emptive steps to protect its interest in order to avoid becoming an unsecured creditor in the examination process. For example, it may be in the landlord's interest to reduce the rent or even suspend the rent on a temporary basis in order to retain the tenant, with a view to reviewing the rent when the market recovers. Arrears do not have to be written off but can be deferred and addressed later on.
It should be borne in mind by the landlord that although the rental income would be reduced, the tenant will still be bound by obligations under the lease to insure, pay rates and keep the property in good repair. In certain circumstances, the loss of these provisions may have as significant an impact on the landlord as the loss or reduction in rent. A landlord should try to be as realistic and practical as possible in the negotiations with the tenant or examiner.