2018 was the "year of the CVA", slashing rents and forcing landlords to get to grips with long-winded CVA proposal documents in an attempt to allow struggling tenants to manage their debts, turn around their businesses and avoid terminal insolvency situations.
The unfortunate reality is that even if they are approved by landlords and other creditors, not all these CVAs will be successful and many tenants are likely to end up in administration.
This article serves as a reminder to landlords of what the insolvency process of administration actually is, the reasons it should be of concern and what they need to bear in mind when managing properties that have been let to a tenant who enters into administration.
Only a few days into the new year and we have already seen HMV appoint administrators, after it announced its second administration in December. In the wake of a whole raft of CVAs that were approved last year, particularly with retail and restaurant chain companies, it's yet to be seen whether the restructurings will be successful or whether these companies too will enter the world of administration. History suggests that many will fail.
In such uncertain times, landlords need to make sure they are fully informed about their options in the event that their tenants go into administration, so that they can take early action to protect their assets and minimise the financial impact on their own businesses.
What is administration?
Administration is a formal insolvency procedure that is carried out in accordance with the Insolvency Act 1986. Once an administrator is appointed their aim is first and foremost to rescue the company so that it can continue to trade. However if that is not possible, then they must seek to achieve a better result for the company's creditors relative to the position they'd be in under a liquidation, or failing that still, to realise the company's property to make a distribution to the secured or preferential creditors.
Why should landlords be worried?
Compared with CVA's, administration places far greater restrictions on the actions that landlords can take, both in relation to recovering any rent arrears, and also to reclaiming possession of the premises for re-letting to other tenants.
This is due to the statutory moratorium, which places a restriction on landlords' abilities to enforce security or pursue legal proceedings in relation to its property and which comes into effect as soon as an administrator is appointed, or earlier if a notice of intention to appoint an administrator is filed at court.
What does the moratorium mean in practice?
Either the administrator or the court must consent in order for a landlord to forfeit the lease. Administrators are unlikely to give permission, and courts must balance the interests of landlords against the interests of the creditors and the administration process as a whole. Whether or not permission will be granted depends on the circumstances overall, but suffice to say that terminating the lease will not be quick and easy.
Rent and other arrears will also be difficult to recover because the administrator or court's permission is required before the landlord can:
- Begin or continue any court proceedings;
- Take any steps to enforce security (which may or may not include drawing down on a rent deposit depending on how this is drafted); or
- Exercise commercial rent arrears recovery (CRAR).
So where does this leave the landlord?
- Claims for rent and other arrears can only be made as an unsecured creditor in the administration. The exception to this, is if the administrator is using the property for the purposes of the administration, then rent can be recovered as an expense of the administration. This means that this rent will form part of the liabilities incurred by the administrator over the course of their appointment which are recovered from the company's assets and paid out ahead of the administrator's own remuneration and before the remaining assets are distributed - a clear advantage to landlords where this applies.
- Rent that is recoverable as an expense of the administration only relates to the period of occupation which actually relates to use for the benefit of the administration and this rent is treated as accruing from day to day, regardless of when the rent is strictly due to be paid under the terms of the lease. Landlords should seek further legal advice to understand whether they can claim rent as an expense and how to calculate the amount due.
- Obtaining vacant possession of the property may be difficult and potentially expensive if pursued through the courts. But anyway, a landlord is only likely to actually want to retake possession of its unit if it is able to quickly re-let, since the landlord will become liable to pay business rates once the lease with the tenant in administration has terminated.
Is there anything landlords can do?
- Monitor tenants to watch out for early signs of financial difficulties and take particular care over those that have recently been through a CVA. If possible, plan ahead and act quickly (consider whether there might be any right to forfeit) if there are signs that a tenant may soon be entering into administration to get in before a moratorium takes effect.
- Look to obtain third party security such as guarantees, if available. Care should be taken when obtaining guarantees from group companies as the insolvency of one member of the group may mean that all companies in the group become insolvent.
- If there are sub-tenants then ensure provisions are in place to permit the smooth redirection of rent from the sub tenant to the landlord.
- Pursue any former tenant if there is an Authorised Guarantee Agreement.
- However if you've missed the boat and the tenant is already in administration, reach out to the administrators to ascertain their intentions for the property. It is easier to work with them than against them and they may be amenable to agreeing a quick surrender. The benefit of this will need to be balanced against any likely dividend prospects, since a surrender could see all claims in the administration extinguished.