Julie Gattegno concludes her two-part series, looking at further key considerations for landlords in the event of an insolvent tenant.
The first part of this series looked at the issues and options for recovering possession from insolvent tenants. This time, it is important to consider some of the practical management issues and associated risks landlords face when dealing with insolvent tenants.
Key takeaways
- Impose a rent stop to avoid losing rights during the decision-making process
- Consider the nature of the insolvency, any restrictions imposed on remedies, the contractual position and commercial drivers with the available options
- Determine strategy swiftly to preserve and protect the landlord’s asset and minimise losses
Access where tenant ceases trading
A common scenario when a tenant becomes insolvent and has ceased trading is for the tenant’s insolvency practitioner to attempt to surrender the lease by returning the keys and/or sending a standard letter – particularly administrators, who, unlike liquidators, do not have the power to disclaim a lease.
Landlords and their agents need to be on their guard and exercise great caution when dealing with insolvent tenants/IPs if they do not want possession and, even if they do, to maintain control over its terms.
If the lease is surrendered, the tenant’s liability for the property comes to an end, including for rates, for which the landlord will then be liable. This can create a real tension in practice, where the landlord needs the administrator’s consent in relation to some aspect of property management, but they refuse to engage on the basis that the property is not being used for the purpose of the administration and they do not want to do anything which suggests otherwise.
Inevitably, the landlord will need access for certain purposes, such as health and safety, security and insurance. The terms of the lease will govern the landlord’s rights and any notice requirements must be complied with, irrespective of the insolvency process the tenant is subject to. This will at least also create evidence that the landlord is treating the lease as continuing, which is helpful where the landlord does not want possession.
The landlord should inform the tenant/IP about the basis and purpose for which it is accessing the property, expressly stating that any keys are being held to the tenant’s order and that the lease is continuing, to provide evidence and avoid any arguments that the lease has been forfeited or surrendered.
If the landlord wants to market the property (without immediately taking back possession) the safest option is to expressly obtain the tenant/IP’s consent (to avoid any arguments).
Tenant’s continued occupation
- Administration If the administrators are using the property for the purpose of the administration, rent is payable as an expense. In recent years we have seen administrators often seeking to avoid (or reduce) this liability by presenting the landlord with their terms for the tenant to continue in occupation, which generally provide for no (or limited) payment of rent on the basis that, if not agreed, the tenant will vacate and the property will be removed from those being marketed for sale. In a difficult market, this pressure tactic can work, as the prospect of getting a new tenant to take on the lease obligations may outweigh the loss of rent income in the short term.
- Company voluntary arrangement/restructuring plan If a CVA or restructuring plan is approved then, save for those properties it vacates, the tenant will continue to occupy on the terms of the lease as varied. As a quid pro quo for the tenant varying the terms/reducing rent, the CVA/plan should contain a landlord’s right to determine the lease on terms, allowing the landlord the option of taking the property back, rather than accepting the lease as varied. This may be the landlord’s only available card, and it should consider timing and conditions attached to this right carefully if this might be a viable option.
Electricity
Where the tenant is in distress, there is a risk that it has not paid for the electricity supply and that the electricity provider may terminate the contract if outstanding charges are not paid.
There is also a risk that a deemed statutory contract with the electricity supplier may arise with the landlord, if the property is no longer occupied but is still receiving a supply.
While the landlord may challenge this, the utility company may threaten to disconnect the supply as leverage, leaving the landlord with little choice but to assume responsibility for it if the ongoing supply is essential and the costs involved in reconnection would be substantial.
It may be preferable to enter into a new supply contract on the best tariff available to secure the supply, rather than risk being bound by a deemed contract on onerous terms.
Business rates
Avoiding rates liability will be a key point for landlords where they do not want immediate possession of the property as this can be a substantial liability.
Any assumption of responsibility for utility charges by the landlord needs to be carefully managed so it does not help support any argument that the lease has ended.
Tenant’s goods
When a landlord recovers possession from an insolvent tenant, there are often goods left in the property, in respect of which the landlord becomes an involuntary bailee.
This carries certain limited duties, including not to damage or destroy the goods, but entitles the landlord to take reasonable action to dispose of them. Determining what action is reasonable can be difficult and poses a risk of liability in the tort of conversion.
Depending on the nature of the tenant’s business and the goods left, these may range from low- to high-value items and may include goods which are third-party owned, which will be relevant to what action the landlord should reasonably take. Certain goods may also be subject to additional statutory restrictions, which need to be adhered to. Dealing with disposal of the goods can also be logistically difficult, so engaging bailiffs/agents to manage the process can be beneficial.
The usual protective step that landlords take is to serve notice under the Torts (Interference with Goods) Act 1977, attaching a schedule or inventory of the goods, requiring the tenant or third-party owners to collect them within a reasonable period, and notifying them of an intention to dispose of them otherwise.
If the goods are not collected within a reasonable time of giving notice, the landlord may sell or dispose of them, deduct any expenses of sale and storage, and hold the balance on trust for the tenant or third-party owner.
In certain cases, particularly where there are high-value items, seeking the court’s authority to sell may offer greater comfort to a landlord, but involves time and expense and therefore is not an option usually pursued in practice.
The lease may also contain contractual rights for the landlord to dispose of the goods if these are not removed on lease expiry, or contain a deemed abandonment provision, which may provide additional rights and comfort. The lease terms should always be checked.
One issue that frequently arises in practice is where the landlord wants to relet immediately after taking possession, but goods remain in the property. In that scenario, the landlord will need to move and store the goods securely off the property while it takes the necessary steps outlined above, or otherwise risk being exposed to a claim in the tort of conversion.
Landlord’s other options
The landlord may have other options to recover rent and other sums unpaid by the insolvent tenant, such as use of a rent deposit, rights against a guarantor and, if the property is sublet, the ability to give notice to divert the sub-rent direct to it.
Again, the nature and stage of the insolvency and the terms of the relevant contracts will determine what options and tactics the landlord can employ to limit its losses.
Ultimately, managing any tenant insolvency situation and devising a strategy promptly should lead to a better outcome for the landlord, even in cases where the tenant has reached the end of the road.
Julie Gattegno is a partner at CMS and a member of the British Property Federation’s insolvency committee
Read part one: Dealing with corporate tenant insolvency
Photo © Razlan Hanafiah/Unsplash
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