UK: Changes to Insolvency Legislation affecting the Landlord and Tenant Relationship

Recent changes to insolvency legislation will substantially alter the rights of landlords against defaulting tenants.

On 15 September 2003 the corporate insolvency provisions of the Enterprise Act 2002 came into force. This follows the coming into force of the remaining provisions of the Insolvency Act 2000 in January 2003. The combination of the provisions in both statutes will dramatically affect the relationship between landlords and tenants.

The objective of the legislative changes is to encourage the regeneration of the affairs of individuals and businesses following an insolvency situation.

Bankruptcies under the Enterprise Act 2002

The Act introduces a fundamental change to the existing bankruptcy system. From now on the majority of bankrupts will be discharged within a maximum period of 12 months unless an application is made to the Court for an extension. However, a debtor may be subject to an income payment order for a period of 3 years and in cases of dishonesty, a bankrupt may face a restriction order of between 2 and 15 years.

A Debenture holder will only be able to appoint an Administrative Receiver in respect of Debentures existing prior to the coming into force of the provisions of the 2002 Act and they will only be allowed in a restricted number cases as far as post 2002 Act Debentures are concerned. The result of this is that Administration Orders will become more common and Administrative Receiverships will become a thing of the past.

Previously, many companies experiencing trading difficulties found that a secured lender would appoint an Administrative Receiver whose duty was to the holder of the Debenture and whose objective was to realise a tenant’s assets to discharge the sums due to the lender. Liquidation and dissolution were often the consequences of the appointment of an Administrative Receiver. The 2002 Act seeks to replace that process and its consequences with a new type of Administration Order.

Administration Orders under the Insolvency Act 1986 were obtained by presenting a Petition to the Court for the appointment of Administrators to give companies a chance to rescue their business, and the usual remedies available to other creditors would be frozen whilst the order continued. However, under the 2002 Act the new Administration Orders will take effect without the involvement of the Court and the main difference is that Administrators will carry out their duties on behalf of the creditors as a whole, not merely Debenture holders. They are required to perform their functions with the objective of rescuing a company or obtaining a better result for the company’s creditors as a whole than if the company were to be wound up. Accordingly, the Administrator’s duty is to seek to rescue the company and obtain a fairer resolution as far as the creditors are concerned.

In future, creditors of corporate debtors are likely to apply for Administration Orders rather than seek recourse to Administrative Receivership. This will have an effect on a landlord’s right to re-enter premises. Prior to the 2002 Act, if a tenant company was placed in Administrative Receivership, a landlord could still forfeit the Lease or levy distress. However, as a result of the provisions of the Insolvency Act 2000, when a tenant company goes into Administration, a landlord cannot forfeit the Lease or levy distress without obtaining the Court’s permission or the consent of the Administrator.

In an application to the Court for permission to forfeit the Lease or levy distress, the Court will be likely to favour giving an Administrator the opportunity to save a company by running it during the period of the moratorium. Accordingly, a landlord is likely to be refused permission to take steps which would mean it was in a more favourable position that other creditors.

However, the Court does have a discretion to order an Administrator to procure payment of rent as it falls due as a condition as refusing permission. If a landlord is able to persuade the Court that the Administration is simply a prelude to the debtor company being wound up, the Court is more likely to give permission for the landlord to exercise the right sought.

A significant change brought about by the 2002 Act is that Crown preference will be abolished. The Inland Revenue, Customs and Excise and Social Security contributions will no longer have to be paid first from the assets of an insolvent company. Further, it is intended that a percentage of the proceeds of realisation of the floating charge assets will be paid to unsecured creditors.

1. A landlord may serve a Notice pursuant to Section 17 of The Landlord and Tenant (Covenants) Act 1995 within 6 months of a debt falling due requiring an original or previous tenant or their guarantor to pay a debt due under a Lease. However, following payment of the sums claimed in a Section 17 Notice the paying party will be entitled to claim an overriding Lease.

2. Pursuant to Section 6 of The Law of Distress (Amendment) Act 1908 where premises are sublet a head landlord can probably still serve a Notice upon a sub-tenant requiring them to pay rent to the head landlord until the intermediate landlord’s debt has been discharged.

3. If a rent deposit is jointly held or is in a tenant’s name and charged to a landlord a landlord cannot take sums from it without permission of the Court where a tenant is insolvent. However, a landlord may take sums in satisfaction of a debt from a rent deposit he holds absolutely.
4. Preliminary steps such as scrupulous checking of potential tenants’ references and trading information and ongoing strict credit control procedures are often a straightforward manner of avoiding problems.