Summary and implications

Now, more than at any other time of this economic cycle, landlords are faced with the prospect of dealing with tenants who have entered one of the various stages of insolvency and require straightforward solutions to bring their tenancy to an end. Often landlords wish to;

  • obtain VP quickly to facilitate reletting (to avoid empty rates liability at least); but also
  • remain a stakeholder in the winding up procedure of a tenant to recoup a share of any pence that may be payable in the pound in respect of any outstanding liabilities.

On the other side, insolvency professionals, under statutory pressure to minimise costs and secure the best return for existing creditors, are keen to obtain quick releases from onerous leases and are willing to adopt a tough negotiating stance to satisfy such an objective. Landlords (often depending on the demand for the space) need to weigh up spending time negotiating carve outs to a release of the tenant against agreeing the document and obtaining VP and clean title quickly.

This article focuses on surrenders where a tenant is in administration. Forfeiture is not available as a quick and unilateral method of termination to a landlord in these circumstances since consent to forfeit is required from an administrator. A documented surrender is also elpful in establishing clean title at the Land Registry quickly. In particular we will highlight simple terms to be included in a deed of surrender that can enable the landlord to preserve insolvent tenant liability.

Considerations for a Landlord

It is worth remembering that a surrender can be effected informally by operation of law (return and acceptance of keys and/or original documents) so good communication on a without prejudice basis should be maintained with agents and other third parties to ensure that no surrender occurs unwittingly before documents are completed.

Once any surrender is effected (even if by deed) a claim against the tenant for past breaches and liabilities (most notably arrears) may (in the absence of express release) be preserved. Landlords should note that most administrators will seek an express retrospective release to avoid any liability.

More dangerously, other liabilities of the tenant, such as those to reinstate or yield up in good repair, arising only at the expiry of the lease, may, without careful drafting, be lost. This is because covenants expressed to arise at or upon the expiry of the term will not survive a surrender (Re ABC Coupler & Engineering Co Limited (No 3) [1970] 1 WLR 702).

Practical steps for a Landlord

Consideration should be given to what covenants the tenant is to remain liable for under the lease post-surrender and whether any surrender needs to be dovetailed to fit in with a new letting/ future proposals for the premises. For instance, if a new tenant is coming in to take the premises on an FR&I basis, a landlord may be less concerned about a dilapidations claim against its former insolvent tenant.

Careful review of the current lease terms is also advised to ensure that no deadlines are missed (or unreasonable ones set) if the tenant's liability to reinstate is conditional upon the landlord giving the tenant reasonable notice to reinstate and to ensure that schedules of dilapidations are served within any stipulated time limit.

Care should also be taken to distinguish and negotiate the approaches to be taken towards all elements of a possibly preserved dilapidations claim. Thought should be given separately to: the tenant's reinstatement obligations; their repairing covenant; and, if necessary, their yielding up requirements.

Elements to include in the draft document

If a landlord has negotiated a deal with an administrator where an insolvent tenant retains some lease covenant liability, the document should provide expressly that liability is preserved so the landlord can take its place in the creditor line up:

a) the surrender must make clear that the release is full and final save for the agreed exceptions;

b) such agreed exceptions should include explicit cross references to the tenant's reinstatement/repairing/yielding up obligations in their lease; and

c) wording should be included that confirms, for the purposes of the surrender, that the term is treated as having determined and expired immediately prior to the surrender effected by the deed. This ensures that the covenants that arise upon the lease's expiry are not swept away by the surrender itself.

Insolvency professionals often adopt a tough negotiating stance with onerous property but landlords are interested parties as much as any other creditors and, if they have negotiated a continuing liability, should insist that the protective wording listed above is included.

Conclusion

Where a landlord has negotiated a surrender with an administrator and the insolvent tenant continues to have liability, a landlord must document the surrender carefully to ensure as far as possible that the liability subsists. This will invariably prolong the conclusion of the deal so a landlord may decide that it is more important to secure vacant possession than preserve its position as one of the insolvent tenant's creditors. 14