Landlord's Hypothec - Worth a shot?

"Landlord's hypothec" is sometimes seen as an archaic form of security for tenant arrears, leading to it often being overlooked.

However, in a climate where many commercial tenants may be struggling to recover their businesses in the wake of the coronavirus pandemic, it could provide a useful tool for landlords to try and maximise their recovery of unpaid rent in certain tenant insolvency situations.

What is Hypothec?

Landlord's hypothec is a right in security over a tenant's moveable property kept in a leased premises.

If a commercial tenant enters insolvency proceedings – including liquidation, administration or a CVA (but not the new 'corporate moratorium' giving businesses breathing space under the Corporate Insolvency and Governance Act 2020)  - the hypothec is engaged over goods belonging to the tenant in the premises at the point it enters insolvency, up to the value of any pre-insolvency unpaid rent.

This means that a landlord's claim for unpaid rent will rank as a secured claim over the goods in the premises. If these goods are sold, the landlord is entitled to payment towards the arrears from the proceeds of sale (after any other secured creditors who might rank before the landlord). 

Landlords should tell the tenant's insolvency practitioner not to remove or otherwise dispose of the goods in the premises without the landlord's consent. The tenant's insolvency practitioner may be able to dispose of the items in the premises without recourse to the landlord, but will have to account to them as a secured creditor.

What does it cover?

Only unpaid rent is secured by hypothec, so any other sums due by a tenant such as service charge, insurance or dilapidations will not be covered and will in most cases form an unsecured claim in the insolvency proceedings.

An important point is that hypothec only covers goods belonging to the tenant. Anything held in the premises on hire purchase or otherwise owned by a third party will not be caught by the security.

How does it work?

Hypothec kicks in automatically on a tenant entering insolvency proceedings.

While there is technically no need for landlords to take action to engage hypothec, it is always best to put the tenant's insolvency practitioner on notice that hypothec is being asserted to ensure it isn't forgotten about. It is also good practice to ask the tenant's insolvency practitioner for an inventory of goods held in the premises as soon as possible after becoming aware of the tenant entering insolvency to find out what actually belongs to the tenant and is subject to the hypothec.

Is it useful – or only hypothetically so?

In practice, there may be situations where a business is being wound up and a large volume of worthless items are left in the premises with no funds available to the tenant or its insolvency practitioners to sell on or otherwise dispose of the goods. The benefit of asserting hypothec in such instances is limited, because it only gives the landlord a secured right to rank in any sale of the items, but it does not entitle the landlord to sell the items itself if the tenant or its insolvency practitioner won't do so (unless otherwise agreed).

However, there will be plenty of occasions where insolvency is used as a means of trying to rescue a business as a going concern – a pre-pack administration sale, for example. In such circumstances, the tenant is still likely to own items of value and if hypothec is asserted, it can significantly increase a landlord's chances of recovering payment of rent arrears.