Learning that your tenant has gone into administration is not, on the face of it, going to be good news for a landlord. However, this article considers how a landlord can best protect its position in these circumstances, and even use the situation as an opportunity to make changes to extract the most value out of its asset, writes Frances Richardson
Early contact with the proposed administrator will determine if they intend to continue to occupy the property with a view to trying to sell the insolvent tenant’s business as a going concern, or vacate the property and seek to hand it back as soon as possible. The landlord’s aim will be to minimise costly and protracted legal action in the first instance, but to zreserve the right to take appropriate steps if necessary.
Services
Often the most pressing issue for a landlord to deal with is taking over any essential services that were the responsibility of the insolvent tenant. In a multilet building, services such as the lifts, hot and cold water, lighting, heating and security systems need to be kept running. In order to avoid the argument that the lease is impliedly being brought to an end by the landlord re-entering the property, the landlord needs to make it clear on what basis it is taking over any of the management obligations. There is usually a widely drafted provision in the lease allowing access for a purpose reasonably required to protect the landlord’s interests.
Rent
If the administrator continues to use the property for the purposes of the administration, then the landlord is at an advantage to most other creditors as rent will be payable as an expense of the administration during the period of occupation. The case of Jervis and others v Pillar Denton Ltd and others [2014] EWCA Civ 180; [2014] 2 EGLR 9 clarified that administrators only pay rent as an expense for the time they use the premises. The position remains that an administrator is liable to pay rent as an expense for the whole space, although the point is open to argument. The landlord is entitled to claim in the administration for instalments of rent for the period of use as they fall due. Any claim for rent unpaid prior to the administrator’s appointment (if any) does not have priority status but can be included in the landlord’s claim (proof of debt).
If the lease remains in existence and the property continues to be occupied by the business in administration, the administrator (as opposed to the landlord) will remain liable for rates. They will be an expense of the administration as a “necessary disbursement” (rule 3.51(2)g of the Insolvency Rules 2016). If the administrator vacates the property and the lease is not brought to an end, then no business rates are payable by the landlord while the administration continues.
The landlord should try to engage at an early stage with the administrator to come to an arrangement on payment of rent and to formally record that agreement. If the administrator will not or cannot co-operate then formal steps can be taken (or threatened), including correspondence and possibly court action to recover unpaid rent (of limited value where the tenant is insolvent) or possession of the property.
In the context of administration, such action is subject to restrictions during a moratorium which arises under paragraph 43 of Schedule B1 to the Insolvency Act 1986 immediately on the administrator’s appointment. This prevents a landlord suing for rent, seizing goods or forfeiting the lease without permission.
CRAR
Commercial rent arrears recovery (CRAR) is a method of enforcement for recovering rent arrears relating to commercial property. It allows a landlord to instruct an enforcement agent to take control of a tenant’s goods and sell them in order to recover an equivalent value of rent arrears following service of the required notices. In reality, it is not a course of action that is often pursued due to reputational issues and the difficulty of establishing if items at the property belong to third parties, who may bring a claim against the landlord for misappropriation of goods.
Administrators often abandon low-value items in the premises after they vacate. The landlord needs to take care when disposing of such goods that they do not belong to third parties.
Subtenants
Subtenants of a commercial tenant that is in arrears may be required by notice to pay rent directly to their superior landlord under section 81 of the Tribunals, Courts and Enforcement Act 2007 (TCEA). The effect of a valid section 81 notice is to make the subtenant liable as if he were the landlord’s immediate tenant. The subtenant may only be liable for a proportion of what the tenant was paying, but it is nevertheless a way of securing at least part of the rent due.
It may be that other tenants or subtenants in the property may want to take more space. The administrators may agree to hand back part of the space in order to reduce their rental liability.
Forfeiture
Forfeiture is a unilateral right of a landlord in prescribed circumstances (for example, non-payment of rent and entry into some form of insolvency proceedings) to bring the lease to an end. It is a way to get a landlord its property back relatively quickly if the tenant/administrators will not co-operate.
Whether or not forfeiture is a sensible step will depend on the state of the market. If there is limited demand for the property there may be a void period following forfeiture, during which the landlord will have to pay holding costs such as business rates.
For non-payment of rent, the lease can normally be forfeited without service of statutory notices required for other types of breach. Where there is a moratorium in place, proceedings can only be brought with permission from the administrators or the court. Obtaining such consent can be a time-consuming process. An administrator is unlikely to consent to forfeiture if the property is required for the purposes of the administration.
If forfeiture is being sought for breach of terms of the lease other than non-payment of rent, then before taking any steps to forfeit, the landlord is required to serve a notice under section 146 of the Law of Property Act 1925 providing details of the breach and requiring it to be remedied and the landlord compensated. The landlord then has to wait to allow the breach to be remedied before seeking possession of the property.
Following forfeiture, a tenant (and even subtenant or mortgagee) has a right to apply for relief from forfeiture. In the context of non-payment of rent, relief will be granted if the arrears, interest and accrued costs are paid. The right to apply for relief lasts for six months after the landlord has obtained possession, which can be disruptive for the landlord, as it is difficult to relet/refurbish the property while the threat of relief remains, albeit it is less likely that an insolvent tenant will be in a position to rectify the situation.
If forfeiture is something the landlord would consider then care should be taken not to act in a way that could be construed as treating the lease as continuing, thereby waiving the right to forfeit. An example of this would be to continue to send rent demands. A fresh chance to forfeit arises after each rental default. Arguably, going into administration is a continuing breach. However, there are commentators who suggest it is a one-off event.
Surrender
While forfeiture is a unilateral remedy, it is open to the parties to agree to end the lease, normally by way of surrender. The parties negotiate the terms, for example to include a settlement on rental payments or dilapidations to the extent that is compatible with the administrator’s duties of fairness to all creditors.
Often administrators will seek to surrender by operation of the law, usually by the unequivocal act of offering to hand back the keys and the landlord accepting them. This poses difficulties with the Land Registry, which requires evidence that the lease has been ended and on what terms. Care should be taken not to accept an undocumented surrender.
Dilapidations
In order to protect the landlord’s position, a schedule of dilapidations should be prepared. This will provide evidence of the level of disrepair and will be the basis of the landlord’s claim against the tenant in this regard (subject to the landlord carrying out a significant redevelopment that would make such works redundant). The amount claimed in respect of dilapidations would be submitted in the proof of debt (as an unsecured creditor).
An opportunity to be seized
A tenant going into administration is an opportunity for a landlord to take stock of its position in relation to its asset. It may be a chance to take back and upgrade space in order to achieve a higher rent going forward from a new tenant.
A constructive relationship with the administrator is key to ensuring a landlord keeps legal costs down and achieves flexibility, including the timing that suits it in getting space back when it is ready to carry out works and relet. In this way, a landlord positions itself to make the best out of a bad situation.
Frances Richardson is counsel and head of real estate disputes at Linklaters LLP
Case study – Julian Stocks, Knight Frank
After the sad demise of King & Wood Mallesons, Knight Frank was appointed by the overseas owners of KWM’s London HQ to be its client representative in London and do everything possible to recover value. The first thing Knight Frank did was call in Linklaters and start to build a relationship with KWM’s administrator. In the following weeks, Knight Frank formulated a strategy to ensure the building kept running (for the subtenants) while planning a full refurbishment and reletting campaign. Nine months on and Knight Frank still has a good relationship with the administrator, the refurbishment is under way and 50% prelet. Frances Richardson’s article covers all the key steps and issues Knight Frank considered and worked on to ensure the process has been taken forward effectively and efficiently to achieve the best outcome for the client.
Top tips for landlords if your tenant goes into administration
■ Consider taking legal action before a temporary or permanent moratorium is in place
■ Check if there is any rent deposit or guarantee
■ Make early contact with the administrator
■ Formulate a strategy for taking back essential aspects of the management of the property
■ Ensure clear communication with any other tenants or subtenants
■ Consider serving notices on any subtenants to pay their rent direct to the landlord following default by the tenant
■ Consider any impact on the insurance position and notify insurer if necessary
■ Consider any notification requirements to, or permissions required from, the landlord’s financiers
■ Consider preparing a schedule of dilapidations/serving notices to reinstate
■ Explore opportunities to relet, including offering more space to other tenants/subtenants
