As recessionary pressures increase on the business community, commercial property landlords are dealing with the spectre of tenant insolvency. Landlords and their managing agents will be acutely aware that tenant insolvency can abruptly bring the income stream to an end. Now, more than ever, a proactive approach to managing tenants in financial difficulty could be the difference between recovering some rent or none at all. Bearing that in mind, what then are the issues that landlords face?
Managing tenants in administration
As recessionary pressures increase on the business community, commercial property landlords are dealing with the spectre of tenant insolvency. Landlords and their managing agents will be acutely aware that tenant insolvency can abruptly bring the income stream to an end. Now, more than ever, a proactive approach to managing tenants in financial difficulty could be the difference between recovering some rent or none at all. Bearing that in mind, what then are the issues that landlords face?
Effect of administration on landlord's recovery options
When a company goes into administration, a moratorium is imposed which prohibits the landlord from raising court proceedings against the tenant without permission from the court or the consent of the administrator. However, in any administration, the administrator's objective will be to achieve the best return for creditors which, on occasion, results in the tenant continuing to trade from the premises. The appointment of an administrator does not bring to an end the tenant's liability to pay rent; nevertheless the administrator will not ordinarily be personally liable for the rent. The rent that accrues while the premises continue to be occupied by the insolvent company will be payable as an expense of the administration (though the administrator will usually argue otherwise!).
Recovering rent from administrators
An administrator cannot be forced personally to pay pre-administration arrears. Whether rent arrears due at the date of administration or post-administration rent is paid by the administrator will depend on the particular circumstances at the premises. The first step that a landlord should take is to establish the administrator's intentions at the property. If occupation continues, immediate pressure should be applied for rent to be paid. When forced to do so, most administrators will make arrangements to pay for that period. If they don't, proceedings should be threatened and if necessary permission sought from the court to raise proceedings.
The landlord should also consider whether the tenant is likely to continue trading until a buyer for the company is found - all well and good if occupation and payment of rent is seamless - or the administrator is simply using the premises to hold a closing down sale to realise the stock. If it is the latter, the landlord should consider the issue of exercising his right to levy distress. In England and Wales, distress allows a landlord to seize goods from leased premises and sell them to raise money to cover arrears of rent. Landlords must obtain the permission of the court before exercising this remedy.
In Scotland, the landlord should consider exercising his hypothec which is the landlords' right in security over moveables on the premises. The hypothec was once a powerful weapon in the Scottish landlord's armoury in that a court action could be raised in which the landlord was given authority to seize goods on the leased premises and sell them. However, the Scottish parliament has in recent years seen fit to abolish the court remedy of sequestration for rent by which landlords previously enforced the hypothec. While the hypothec itself has not been abolished, landlords have certainly been left worse off by the demise of sequestration for rent. In its place, landlords now have a preferential claim in the insolvency if they exercise the hypothec. In summary, the hypothec covers arrears of rent due but unpaid and, in practice, the administrator should agree that the landlor's claim over the goods owned by the tenant on the Premises, if sold, will be met before that of other creditors. Experience to date indicates that some insolvency practitioners struggle with this concept.
On the basis that if you don't ask you don't get, landlords should always seek legal advice on exercising the right to levy distress or hypothec at an early stage in order to maximise recovery.
How to recover possession when the tenant is in administration
The moratorium mentioned above also prevents immediate removal action being taken against the tenant without the permission of the administrator or the court. Therefore, the traditional options open to a landlord to recover possession by forfeiture of the lease (or in Scotland following service of irritancy notices) are not immediately available without getting involved in not one but two court proceedings - the administration process (in which consent is sought to bring proceedings) and, secondly, an action of removal. Landlords should not be put off by that as there will be circumstances in which the court will grant permission and allow termination of the lease to proceed. In deciding whether or not to allow a landlord to raise proceedings to recover possession, the court must balance the competing interests of the landlord with the objective of the administration.
For example, the terms of sale of a tenant's business in administration will often provide for the transfer of the tenant's assets to a third party, including any premises. This can frequently result in the third party occupying the tenant's premises unlawfully. In England and Wales if the landlord seeks the permission of the court to forfeit it is combined with a request for an order for possession and that is enforceable against the tenant and any unauthorised occupier of the premises.
In Scotland, a landlord can raise an action to remove the unauthorised occupier directly. Furthermore, where trading by a third party has been ongoing at the premises but no rent is forthcoming to the landlord from the administrator, a landlord is likely to be in a stronger position to obtain the consent of the court to raise proceedings for recovery of possession against the tenant. Obviously, whether or not a landlord wishes to go to the time and expense of embarking on separate court procedures to recover possession from the tenant and evict unlawful occupiers, will depend on the commercial drivers at the premises; however, either action, or a combination of both, applies varying degrees of pressure on an administrator which could result in payment being made or the court granting termination of the lease.
Summary
In summary, all is not lost when tenant insolvency rears its head. Admittedly, the ultimate recovery will depend on a range of factors but well advised landlords will stand a better chance of maximising their return if they have a good understanding of their tenant's business and what is going on at the premises. To this end, it has never been more important for asset managers to gather intelligence and look out for the danger signs from tenants that they are in financial distress. Tenants slipping into arrears, requesting rental "holidays" or moving to monthly payments should all be treated with care as it could be that an administrator is just round the corner.
