Landlord’s remedies

Imminent changes to the law are about to be made which will impact on a landlord when faced with tenant insolvency. The primary concerns of a landlord will be dealing with any rent arrears in the short term and the premises in the more medium to long term.

Distress

When dealing with arrears, distress should be attempted first. Distress is the seizing of a tenant’s goods in lieu of rent arrears. If there are insufficient goods, then court proceedings should be issued. Court proceedings are only an option if the monies due are certain. There are increasing hurdles facing landlords as a result of recent and proposed changes in the law. The introduction of the Insolvency Act 2000 and the Enterprise Act 2002 means that directors of insolvent companies have greater powers to rescue their troubled companies. In the current climate, Administration appears to be (and looks likely to continue to be) the favoured option for these directors.

Administration is applicable where a company is in severe trouble but still has some hope of recovery. Administration will involve the company being put into the charge of a court-appointed administrator. The practical effect of going into administration is that it cannot be wound up without the court’s permission.

A landlord may find it difficult to take action against a defaulting tenant in administration because the permission of the Court (and the administrator) is required before distrain of rent can be exercised or proceedings issued.

Given that the objective of an administration is to rescue the company, it is highly improbable that the Court or an administrator would grant permission to the landlord to distrain for rent or issue proceedings.

Furthermore, Part 3 of the Tribunals, Courts and Enforcement Act 2007 (which received Royal Assent on the 19th July 2007) will make it more difficult for landlords to recover arrears. The existing remedy of distress will be abolished and replaced by the new commercial rent arrears recovery (CRAR) procedure.

The CRAR requires an enforcement notice to be served on the tenant, who must be in arrears before the service of the notice, and the overdue rent must exceed a certain amount (limit has not yet been decided) before goods can be seized by the landlord. In addition, the landlord is not able to exercise this remedy itself but must appoint a certified enforcement agent.

The CRAR will result in an erosion of the “element of surprise”. The enforcement notice is likely to prompt dishonest tenants to seek to move goods from the premises and out of the landlord’s reach. Landlords can take some comfort from the fact that they are, in principle, able to pursue the goods to the new location. However, the time and cost in so doing is likely to make it an unattractive option.

It remains to be seen whether the overhaul of the process of enforcement by way of seizure and sale of goods will, in practice, be a benefit to commercial landlords or, whether it will simply hinder their attempts to recover arrears from defaulting tenants.

The CRAR is not yet in force and no commencement date has been set.

Forfeiture/Surrender

Where a landlord is faced with an insolvent tenant, it may be an attractive prospect for a (in the medium to long term) to forfeit the lease and recover possession.

In a depressed market, where the property is over-rented, tenants and sub-tenants are likely to want to quit the premises but landlords are unlikely to want to take possession. In a buoyant market, where rents are rising, the insolvency of a tenant may present an opportunity to obtain vacant possession in order to re-let at a higher rent or redevelop the site.

As with rent arrears, landlords face a number of hurdles. If the defaulting tenant is in administration, the consent of the Court and the administrator will be necessary before a lease can be forfeited and, as with rent arrears, this can be extremely difficult in the early stages of administration.

The proposed changes to the law of forfeiture would mean tougher times for landlords.

Forfeiture by peaceable re-entry will no longer be permitted and default notices will need to be served in respect of all tenant breaches. Following service of such a notice, the landlord may apply to the Court to have the tenancy terminated.

However, Landlords should not panic just yet. The proposed changes to the forfeiture procedure are not high on the agenda of the powers that be and consequently, may be a long way from becoming law (if they become law at all).

Disclaimer

Where the immediate tenant has gone into liquidation or become bankrupt and the landlord does not want to take possession, disclaimer is likely. Only a liquidator or trustee in bankruptcy can disclaim a lease (disclaim is a unilateral step which brings the lease to an end). If there are subleases which the landlord wants to preserve, he will seek to regularise the position in order to preserve the income stream.

The landlord has no power to force the subtenant to stay following disclaimer of a head lease. If the subtenant wants to remain, it can do so by applying to the Court for the head lease to be vested in it; or simply remain in occupation, paying the rent and complying with the obligations under the head lease.

Additional security

A volatile economic climate coupled with debtor-friendly insolvency procedures and proposed changes to the law, means that landlords will need to be more sophisticated in their lease negotiations. Increasingly, landlords are relying on the well established landlord remedies such as guarantors, rent deposits, sub-tenants and authorised guarantee agreements (AGA) from previous tenants. These are good sources of security for a landlord in the event of a defaulting tenant. It goes without saying that landlords should be seeking to secure a rent deposit or guarantor when negotiating the terms of a new letting. Solicitors acting for landlords should ensure that a rent deposit is drafted to be either held on trust or on a charging basis failing which the landlord will rank along side other unsecured creditors in the event a tenant becomes insolvent. If a tenant is in administration, then the landlord will require the consent of the court or administrator to enforce any security.

Where permitted, the landlord should always request an AGA from the exiting tenant on an assignment of a lease. Seeing as a landlord is restricted in its actions against a tenant in administration, Individual Voluntary Arrangement (IVAs) and Company Voluntary Arrangement (CVAs), it is useful to have a former tenant under an AGA on the hook. It is crucial for a landlord to consider the extent of a guarantor’s liability and when drafting the guarantor provisions, it is important to ensure that the guarantor’s liability extends to any holding over period under a protected tenancy. An additional consideration is whether the landlord requires the guarantor to simply guarantee the rent or require the guarantor to take a lease in the event of forfeiture or disclaimer.

It should be noted that unless there is express wording to the contrary the guarantor’s liability will end upon dissolution of the tenant company.

Section 17 of the Landlord and Tenant (Covenants) Act 1995 requires landlords to serve notice on former tenants and guarantors. However, notices should only be served on guarantors and former tenants if the landlord is certain that they would make a satisfactory tenant as once the arrears are paid of by the former tenant or guarantor, then they are entitled to take an overriding lease.

Surrender

Where forfeiture is not an option, a landlord may decide to accept a surrender of a lease from the tenant which is essentially the landlord agreeing with the tenant to bring the tenancy to an end.

In a rising market, surrender may be a better option for the landlord as it enables him to re-market the property and secure a tenant with a better covenant. As soon as the lease is surrendered, the landlord gets the premises back and is able to look for new tenants.

On the flip side, in a slow market, the chances of recovering the rent from the current tenant maybe greater than finding a replacement. Furthermore, a landlord will need to consider the implications of leaving the premises empty. As from 1 April 2008, full business rates are payable on buildings that have been vacant for 3 months or more. (in the case of industrial/warehouse property the period extends to 6 months or more).

Agreement with the tenant

A landlord could consider an informal arrangement with the tenant such as granting a rent concession or offering alternative premises. These are considerations which are worthwhile in respect of a reliable tenant. In the current climate, landlords may be more willing to enter into an arrangement with a tenant in difficulties rather than face the prospect of re-letting or being left with a void.

Conclusion

We are likely to see a rise in the number of corporate insolvencies, and companies going into administrations or entering into CVAs and IVAs.

It can be argued that the current/proposed changes to the law are more favourable to tenants than landlords. Therefore, the key message for landlords is to remain diligent, watch for early warning signs of tenant insolvency/financial difficulty and act quickly when the landlord suspects that a tenant may be in financial difficulty.

(The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. No responsibility can be accepted for any loss as a result of acts or omissions taken in respect of this article.)

 

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