Tenant Insolvency
Tenant insolvency is on the increase and nowhere is it more common than on our high streets where household names such as Woolworths, Zavvi and Land of Leather have been some of the more high profile casualties!
Administration
The first indicator for many landlords that something may be amiss is when a tenant fails to make its quarterly rent payment and then shortly afterwards they receive a letter from an Administrator or an Administrator's Agent informing him that the tenant company is about to go into administration. The letter will usually be followed by some form of request; typically these include asking for rent holidays, for rent to be paid monthly in advance rather than quarterly or consent for the tenant to assign its lease.
Proposed Assignment
In the case of a proposed assignment by a multiple retailer, the request for assignment may well be under what is known as a "prepack" arrangement whereby the assignee is actually a company that has the same or similar shareholders to the tenant company which is, or will shortly be, in administration. Where this happens it is in reality a method of whereby the tenant's business can rid itself of its unprofitable outlets to enable it to continue to trade from its more profitable ones.
What can a landlord do?
The first thing to make clear is that in many cases by the time the landlord has received the letter there is a strong likelihood that the tenant company will already be in administration. Once it has been verified that it is in administration, it is helpful if everyone can ensure that they refer to the tenant company as being in administration. It is understandable that people may make reference to the company being either in liquidation or being in receivership, however the legal remedies available to a landlord differ dramatically depending on the actual insolvency position of the tenant company and therefore it is always good practice to use the correct terminology.
Forfeit The Lease
For example, when a company is in administration and is therefore not paying its rent then the natural reaction of a landlord is to want to forfeit the lease on the grounds of non payment of rent. However when a company is in administration, proceedings cannot be brought without the permission of the Court or the consent of the Administrator. In the vast majority of situations this will actually make the forfeiture of the lease at this stage very difficult, if not impossible. Similarly the Administrator will not be able to disclaim the lease, only a liquidator has the power to do this.
The logic for allowing a company to go into administration was meant to provide the company with much needed breathing space in order that decisions could be made as to whether there was a business or part of a business that could be saved thus preserving employment for some or all of it's workforce.
New Lease
Whilst forfeiture proceedings may therefore be threatened, in the vast majority of cases it is unlikely that the leases will be forfeited. The reality is that some consensual deal will be struck, for example the existing lease may be surrendered simultaneously with the grant of a new lease to the company which has acquired the business of the tenant in administration. In these instances of course the terms of a new lease may well be much more tenant friendly than the original lease. What a landlord must consider is therefore, whether in the current economic climate they would prefer to have their premises occupied or whether they will take their chances on finding a replacement, but in the meantime are prepared to suffer the rental void and also pay rates on the premises in question!
If you have been faced with any of the situations outlined above then you can take some small comfort in the fact that you are not alone!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
