British Property Foundation (BPF) issues warning to landlords over pre-packs - Palmers Solicitors

British Property Foundation (BPF) issues warning to landlords over pre-packs

A recent statement by the British Property Foundation (BPF) has warned landlords to take extra security from tenants in order to protect themselves against increasing manipulation of the insolvency system, including by the use of “pre-packs”.

“Pre-packs” occur where there are negotiations for the sale of a company’s business and assets prior to a company going into administration. The actual sale is executed immediately upon the appointment of an administrator.

This option for business rescue has grown in popularity; in 2012 there were an estimated 728 pre-pack deals recorded which accounted for almost 30 per cent of all administrations.

Though pre-packs are seen as an important way of making sure that employees and contracts are saved and the value of the business is protected, it is the procedure and its transparency which has been called into question.

The particular problem for landlords is thus: current insolvency rules stipulate that if a business goes into administration immediately after a rent payment day, it can continue to use the property for free until the next due date for rent without paying any rent at all – which causes loss for landlords.

A BPF spokesman said that landlords have experienced some real problems where the owners of tenant companies use the prepacks strategically to restructure their businesses, lose nothing, and gain a competitive advantage over their opponents. Meanwhile, landlords are left to suffer the consequences of loss of rent occasioned by those pre-packs.

The BPF defended its unprecedented action in the release of the statement and said that it did so reluctantly, largely due to the extra cost it would undoubtedly place on occupiers, and urged the government to act quickly to restore creditors’ faith in the rules governing insolvency.

The statement included advice to landlords to ensure, when arranging commercial leases with a group of companies that they take a guarantee from the parent company to protect against the subsidiary being put into administration.

Also included was the suggestion that landlords should consider taking an extra three months’ rent from tenants as a deposit, given the widespread use of the tactical timing of insolvencies and the losses that are suffered by landlords as a result.

Our insolvency experts at Palmers can advise on all aspects of debt and insolvency, including landlords and their actions regarding pre-packs.

For more information, please visit our website or contact Andrew Skinner.