UK: UK Tenant Default and Insolvency

Last Updated: 29 September 2009
Article by Trevor Garrood

Market overview

For the UK commercial investment market the last three months have brought some signs of recovery, with an increased level of interest from buyers who perceive that prices have fallen too far. However, quality of tenant and length of income stream remain extremely important. In the commercial letting market there are still low levels of tenant demand and downwards pressure on rents, although some agents now feel the bottom has been reached.

On the residential side there is evidence of a limited recovery. Buyer demand has increased due to better availability of mortgage finance, and the increasing perception that now might be a good time to buy. Prices and rents nonetheless remain well below their previous peaks. Activity levels, whilst increasing, are not high by historical standards.

Tenant Default and Insolvency

Given the current economic climate, we briefly examine here some issues in relation to tenant default and insolvency.

Landlords need to keep a close eye on tenants. A tenant restructuring its affairs is often a precursor to insolvency, and therefore landlords should monitor tenants for early warning signs such as credit downgrades, rights issues and poor trading statements. Landlords who are aware of their legal remedies, and who act quickly and decisively to enforce them, are more likely to obtain recovery than those who simply allow events to unfold.

If a tenant is not paying rent but is still solvent then the landlord should strongly consider serving a statutory demand on the tenant or sending in bailiffs to recover the arrears whilst they have the opportunity. If a tenant company is placed in administration (a form of insolvency where efforts are made to salvage the business) then there is a moratorium preventing any form of legal action against the tenant without the consent of the administrator or permission of the Court.

It is important not to allow arrears to build up based on the false hope that the tenant's trading conditions will improve; by the time it becomes clear they will not the landlord could be owed a large debt which then proves irrecoverable.

If a landlord is considering forfeiting or taking a surrender of a lease in order to recover possession from a defaulting tenant it should think carefully before taking any action. Unless the landlord has an immediate use for the property, it must bear in mind that once the lease ends time starts to run for the purposes of rates relief (rates are a local property tax). Empty industrial and warehouse properties benefit from six months relief, and other commercial properties only three months – after which time the landlord will be responsible for the full rates payable. As referred to above, it is also worth remembering that a landlord cannot forfeit a lease of a defaulting tenant in insolvency without obtaining the consent of (where appropriate) an administrator, liquidator or the Court.

Landlords should not forget that they can also potentially recover rental arrears from a previous tenant, if that tenant provided the landlord with an Authorised Guarantee Agreement when it assigned the lease. In certain circumstances the previous tenant may also be required to take a new overriding lease of the property if the current tenant company is liquidated.

When a landlord has entered into some form of insolvency procedure, there can be some confusion for the tenant as to whom rent should be paid. For example, should the rent be paid to the landlord, an appointed insolvency practitioner or a superior landlord (who may be demanding that payment be made direct to it)? The tenant needs to be clear on this subject, in order to avoid remaining liable for rent by incorrectly paying the wrong party.

Where a landlord itself has a leasehold interest and enters into liquidation, the appointed liquidator may decide to disclaim that lease. The result in such a case will be that any sublease will also be brought to an end. Whilst the subtenant will have the right to apply for a vesting order for the superior lease to be vested in it (so allowing it to remain in the property) it may find that the terms of that lease are less favourable than those under its own (now terminated) sublease.

For both landlords and tenants it is vitally important to consult a property lawyer as soon as possible for specialist advice. Matters should be kept under review and, if possible, necessary action taken before any formal insolvency process commences; after such commencement the landlord's or the tenant's ability to take further action is likely to be restricted.

The Ince property team has been advising both landlords and tenants on these types of issues over the last year, and for the moment we foresee no decline in the number of enquiries of this nature.

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.

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