On the Sixth Day of Christmas...

… disputes lawyer, Lisa Stratford, takes a look at the types of insolvency, a landlord’s remedies and other important factors for landlords to consider where they have an insolvent tenant. This is the sixth in a series of 12 articles in which our real estate disputes team look back over the key real estate decisions of 2020*

Given the raft of retail insolvencies in recent days including Debenhams, Bon Marche and the Arcadia Group, we think it is worthwhile reviewing the options a landlord has when faced with an insolvent tenant.

Firstly, landlords need to understand which of the different insolvency regimes applies to their tenant, as they have different consequences. Here, we have highlighted the main regimes a landlord may come across and the key things to remember for each.

Administration (Bon Marche) 

Administration is a mechanism which is intended to save companies. When a tenant enters administration (or serves notice of intention to appoint an Administrator), a moratorium comes in to effect, prohibiting enforcement or legal action without the consent of the Administrator or the leave of the court. This means the landlord’s enforcement options will be limited.

Rents will be payable as an expense of the Administration (which is payable from the tenant company’s assets before the Administrator’s own fees) where premises are used for the benefit of the Administration. This often happens where the Administrator enters in to a pre-pack sale, and the phoenix company is allowed by the tenant / Administrator to occupy premises as part of that sale.

Liquidation (Debenhams) 

Debenhams, having undergone a CVA in 2019 and entered Administration in April 2020, is now poised to enter in to liquidation, meaning the company is to be wound up entirely.

Where a liquidation is compulsory (i.e. Court based liquidation) a statutory moratorium applies, restricting the landlord’s options. In other liquidations, there is no default moratorium and so the landlord can still seek arrears or forfeit.

Rents are payable as an expense if premises are used for the benefit of the liquidation. However, Liquidators have the power to “disclaim” the lease by serving notice of disclaimer on the landlord. Doing so terminates the lease and the tenant’s liability under the Lease, without impacting the liability of any third parties, such as guarantors to the lease.

Creditors’ Voluntary Arrangement (“CVA”)

CVAs are a controversial topic and worthy of their own article, but in summary a CVA is an arrangement between a company and its creditors (or some of them) and varies the company’s contractual liabilities.

A landlord’s remedies are not restricted until the CVA is approved, but at that point the CVA binds all creditors, whether they voted in favour or not. A landlord’s options may therefore be limited once a CVA is in place, though landlords may take some comfort from two court decisions in which it was determined that a CVA cannot force a landlord to accept a surrender (Re Instant Cash Loans Ltd [2019] EWHC 2795 (Ch)), or remove a landlord’s right to forfeit a lease (Debenhams Retail Limited [2019] EWHC 2441 (Ch))

Note: The Corporate Insolvency and Governance Act 2020 (CIGA) also introduced provisions for “restructuring plans” and standalone moratoriums; to date, use of these seems limited, and we have therefore not included details here. 

Options for Landlords 

Forfeit the lease

Forfeiture brings the lease to an end and will also terminate any underleases. Under the Coronavirus Act 2020, landlords cannot forfeit leases for non-payment of rent during the period to 31 December 2020 (there is no confirmation yet as to whether this period will be extended again to prohibit forfeiture for rent arrears in to 2021). However, most modern commercial leases include the tenant’s insolvency as a ground for forfeiture. Landlords wishing to pursue this option will need to serve notice under section 146 of the Law of Property Act 1925 first, before taking forfeiture action.

Depending on whether a moratorium applies, landlords may also need consent or the leave of the court prior to forfeiture; for example, if the tenant is in Administration, the landlord must obtain the Administrator’s or the Court’s consent before pursuing forfeiture action.

If the landlord does forfeit, it is also worth remembering that the tenant or third parties such as undertenants or the tenant’s mortgagee may apply for relief from forfeiture. If relief is granted, it effectively reinstates the lease as if forfeiture never occurred. Generally, any party seeking relief has a period of 6 months in which to apply to Court for relief.

Recovery from third parties

Landlords should check whether any third parties, such as guarantors or former tenants, can be pursued for any arrears. In the case of former tenants or guarantors, it will usually be necessary to serve notice on the third party under section 17 of the Landlord & Tenant (Covenants) Act 1995 within 6 months of the sums falling due.

Commercial Rent Arrears Recovery (CRAR)

It may be possible for a landlord to exercise CRAR – i.e. instruct an enforcement agent to attend the premises - to take control of the tenant’s goods with a view to recovering arrears. However, the Coronavirus Act 2020 currently prohibits the use of CRAR unless the arrears equate to 276 days’ rent (rising to 366 days’ on 25 December 2020). CRAR is not available if a moratorium applies.

Money claim for outstanding sums

Where there are arrears, landlords can issue a money claim at court (subject to obtaining consent first, where required). However, landlords will be unsecured creditors, so the insolvent tenant may not have the means to pay a court judgment (the position may differ if rent can be claimed as an expense). Again, where a moratorium applies, no claim can be brought without consent.

Other matters

Proposed assignment of the lease

In some circumstances, a landlord may be able to improve its position if it can reasonably refuse consent to a proposed assignment, unless the arrears under the lease are paid. This is most likely to happen where the tenant is in Administration, and is most likely to be of help to landlords of premises that the tenant’s purchaser particularly wants to keep. Landlords will need to check the lease in order to decide whether it is reasonable to withhold consent to the assignment in each instance.

Business rates

Whilst the lease remains in place, the tenant is responsible for paying Non-Domestic (Business) Rates. If the lease is terminated, whether by surrender or forfeiture, rates liability will pass back to the landlord until the premises are re-let. In a difficult market, where re-letting may not be easy, landlords will often seek to keep the lease in place for as long as possible.

Removal of tenant’s belongings 

There are statutory procedures a landlord should follow prior to disposing of (or selling) any items the tenant leaves behind in the premises. It is important that the landlord keeps a record of the items left at the premises and takes reasonable care of them, pending their removal, in order to protect itself against any adverse claims by the tenant or third parties later.

Insurance 

Landlords must ensure their insurance is not invalidated if the premises are left vacant. Insurance policies should be reviewed in order to determine whether there is a need to provide security or similar.

Conclusion

This year has been tough for everyone, and unfortunately it seems likely that there are more tenant insolvencies to come, especially in the retail and leisure sectors. However, landlords have also suffered the effects of this year and still need to comply with their own obligations. It is therefore important that landlords act quickly to protect their interests and understand their options if their tenant is or looks likely to become insolvent.

 *yes, we know we are enjoying our 12 days of Christmas a bit early, but we just couldn't wait!