As a landlord, what can I do if my commercial property tenant goes bust?

It is no secret that being a business owner is tough at the moment, with businesses going insolvent left and right. It is only natural for landlords to be worried about how a tenant’s insolvency would affect them.

If a commercial property tenant becomes insolvent, there are an array of legal restrictions that apply based on the type of insolvency process the tenant is in.

Should you have an inkling that a tenant is about to become insolvent, it is imperative that you seek legal advice.

What are the types of insolvency processes?

When a company goes insolvent, it tends to fall into one of three main categories: Company Voluntary Arrangements (CVA), administration or liquidation.

A CVA can help a company to reach an agreement with its creditors regarding the repayment of its debts over a fixed period. This can help a viable business continue trading while addressing its financial difficulties. Note that in a CVA, landlords can potentially be bound by variations even if they did not consent, and so CVA proposals should be reviewed and responded to quickly.

Administration is designed to protect a company from creditor action while an administrator assesses its future. It is often aimed at ‘rescuing’ a company as a going concern, and ideally to achieve a better outcome for creditors than would be possible through liquidation. Often a statutory moratorium will be imposed during the administration.

A company in liquidation can no longer trade or employ staff, and once it has been removed (‘struck off’) from the Companies Register at Companies House, it will no longer exist.

When a commercial tenant becomes insolvent, or looks as though it may be heading that way, it is best to let your solicitor know as soon as possible. The approach your solicitor will take will depend on which process applies to your tenant company (CVA, administration or liquidation), as that will affect how the property can be recovered for reletting. Bear in mind that additional restrictions may apply where a moratorium exists.

If, in fact, the tenant company is not yet insolvent, but it looks likely, there may be an option to take pre-emptive action.

How do I get the property back?

Before the property can be relet, the lease will have to be terminated. When the tenant is insolvent, there are three ways that this can happen.

These are:

Forfeiture – Depending on the terms of the lease and the insolvency procedure involved, it may be possible to forfeit the lease and recover possession of the property. Forfeiture can often be carried out by peaceable re-entry without court proceedings, although the courts may become involved if the tenant applies for relief from forfeiture or if there is a dispute over the landlord’s right to forfeit. The availability and timing of forfeiture depend on the lease terms and on the specific insolvency process and moratorium status. For example, if the tenant is in administration, a landlord will generally require either the administrator’s consent or the court’s permission before taking steps to forfeit the lease. Similar restrictions may apply in liquidation and where a moratorium is in place.
Disclaimer – If the tenant enters liquidation, the liquidator may decide to disclaim (effectively, ‘renounce’) the lease if it is considered onerous property. A landlord or another interested party can serve notice requiring the liquidator to decide whether to disclaim, following which the liquidator generally has 28 days to decide. If the lease is disclaimed, this brings the tenant’s rights and obligations under the lease to an end, although landlords may still have claims against guarantors or former tenants depending on the circumstances.
Surrender – In some cases, it may be possible to negotiate a surrender of the lease with the tenant or the insolvency practitioner. This can provide a practical solution for both parties by allowing the landlord to regain possession of the property more quickly and enabling the insolvent tenant’s estate to avoid ongoing lease liabilities. However, a surrender should be carefully documented, usually by deed, and its effect on guarantors and other parties should be considered before any agreement is reached.

What comes next?

Once the tenant has vacated the property, items belonging to the tenant may still be at the property.

While the insolvency practitioners should have dealt with most of the tenant’s assets, if you are left with unremoved items, you must be careful with what you do next.

You may want to just throw the assets away; however, you may be breaking the law by doing this.

Typically, a lease will have a clause which covers this situation. This may require you to give the tenant a timeframe to remove their items before you do.

If such a clause doesn’t exist, the best idea is, nonetheless, to give the tenant a reasonable timeframe to reclaim their assets before you dispose of them yourself.

How can we help?

Insolvency is unfortunate for both tenants and landlords. However, during this uncertain time, landlords need to take appropriate actions to protect themselves and their business interests.

Our team can help you lease with insolvency practitioners and can advise you on the best steps to take to protect your commercial interests.