Landlord remedies: What to do when your tenant goes bust
During the course of 2018, we have been called upon by a significant number of our investor clients to advise on the impact of their tenants falling into financial difficulty and failing to comply with their lease obligations. Many of these cases have involved retail premises and this is perhaps unsurprising given the challenges faced by the retail sector, which have been well publicised.
This year has also seen a rise in the use of CVAs (company voluntary arrangements) by retail tenants seeking to dispose of leases at poorly performing locations and to negotiate rent reductions elsewhere. CVAs are a topic for another time!
We are usually called in to advise when the client has heard that the tenant has “gone bust”, leaving rent arrears and other liabilities. At that point, it is important to identify the particular insolvency process involved – specifically whether we are dealing with an insolvent company that may be in administration or liquidation (or proposing a CVA) or a bankrupt individual. The reason for this is that certain insolvency processes will prevent landlords from relying on certain remedies.
In the usual course of events, landlords have a number of available remedies, including:-
- Forfeiture – which can allow a landlord to terminate a lease and recover possession where their tenant is in default (to include where there are rent arrears)
- Drawing down a rent deposit, if held
- The Commercial Rent Arrears Recovery (CRAR) procedure – under which a landlord may take control of goods at the premises via certified enforcement agents
- Claims against the tenant’s guarantors and, in certain circumstances, former tenants and/or their guarantors
However, if a tenant company is in administration then the options are limited and specialist advice should be sought on the best approach. The primary reason for this is that the permission of the court or administrator’s consent is generally required before a landlord can take any action against the tenant.
Similarly, where a tenant company is in compulsory liquidation (which usually arises where a creditor has presented a winding up petition because the tenant is unable to pay its debts) leave of the court is generally required in relation to any enforcement action once a winding-up order has been made.
It should also be noted that a liquidator and a trustee in bankruptcy have the ability to ‘disclaim’ a lease. The effect of this is that it terminates the tenant’s rights and liabilities under the lease and the landlord and tenant relationship effectively comes to an end. However, the liabilities of others under the lease (such as guarantors or former tenants) continue and particular care needs to be taken to avoid subsequently releasing them as well.
If a tenant appears to be in difficulty and arrears accrue, it is important to seek early advice.
If you have found yourself in this situation, or you need professional property litigation advice on another matter, then contact me directly via jonathan.bouchta@GAsolicitors.com or by calling 01752 203500.
Jonathan Bouchta, property litigation solicitor