Lisa Stratford highlights the things retail tenants should be aware of if their landlord becomes insolvent.
Key points
- Don’t panic – landlord insolvency should have a minimal effect on tenants and their use of the premises
- Deal with any correspondence from an IP promptly (for example, demands for payments under the lease to be made to a different account)
- Tenants should keep their address for service up to date with the landlord
- Ensure any notices to be served on the landlord are served correctly
- Obtain legal advice to determine options available if there are landlord breaches of covenant, or you wish to pursue a claim against the landlord
We often hear about pressure on the retail sector affecting retailers, such as House of Fraser, Debenhams, HMV and, most recently, Patisserie Valerie.
But the same pressures also affect shopping centre owners and landlords. For example, the Nicholsons Shopping Centre in Maidenhead announced it was going into receivership just before Christmas and was sold in January. More casualties are reportedly on the way: according to APAM, around 200 shopping centres, with a combined value of about £7bn, are likely to encounter problems soon, as they reach the end of their financing arrangements.
If the landlord of commercial premises becomes insolvent, what does it mean for the tenant? Here we discuss how shopping centre tenants might find out their landlord is insolvent, what impact this might have and what tenants should consider.
The table below distinguishes the types of insolvency that are most likely to occur, and their effects.
How will tenants know?
Tenants are likely to receive notice of any formal insolvency by way of a letter from the appointed insolvency practitioner (IP) soon after their appointment. Landlords may even notify tenants informally in advance of an intention to enter an insolvency regime.
Tenants may also spot a landlord’s insolvency before it occurs, by looking for warning signs such as:
- A fall in the morale of the landlord’s staff (where there are employed centre managers, for example).
- Landlord changes its management style – such as pursuing any arrears or carrying out commercial rent arrears recovery (CRAR) faster than they historically have.
- Landlord’s suppliers or staff disappearing, or there being difficulty progressing negotiations or discussions.
It is also possible to carry out searches for winding-up petitions (to start liquidation), notice of which may also be in the press.
Effects of landlord insolvency
Tenants’ leases are not directly affected by the landlord’s insolvency and tenants can generally continue using premises as normal. However, it is important to bear in mind the following:
Payment of rent: Usually, at the same time as the IP notifies tenants of the landlord’s insolvency, the IP will direct the tenant to continue paying rent and service charge, but to a different bank account.
The IP may also (or alternatively) request a copy of the tenant’s lease. It is essential that tenants pay any sums due to the correct account, once they receive sufficient notice. Otherwise, tenants may be required to pay again (to the IP) and will need to try to recover any payment made directly to the landlord.
Providing services/maintaining the centre: Often, the IP will continue to provide services (such as maintenance, security and waste disposal) or instruct managing agents to do so. This is necessary in order to maintain the value of the centre, so the landlord’s interest can be sold for the benefit of creditors.
Different types of insolvency may have different effects. For example, LPA receivers may try to improve the centre and formalise occupations in order to improve the asset value.
Insurance: Insurance tends to be paid annually, so it is unlikely that the insolvency of the landlord would immediately cause tenants a problem. Further, licensed IPs are likely to insure the premises from the date of their appointment (or at least have their interest noted on the landlord’s policy).
Landlord breaches: A tenant with an insolvent landlord that is in breach of the landlord obligations under the lease may experience difficulties. There may be a moratorium preventing the tenant from bringing a claim against the landlord without the court’s permission.
The court is unlikely to allow a claim purely for money to proceed against an insolvent landlord, but may be more willing to assist where – for example – a tenant seeks an injunction requiring a landlord (or IP) to do something, such as where urgent repair to the centre is required.
Notices: Extreme care must be taken to ensure that tenants serve any notices (for example, break notices or notice under the Landlord and Tenant Act 1954) on the correct party and at the correct address – both of which could well change if the landlord is insolvent.
Recovering debts from insolvent landlords: Tenants are most at risk if they are owed money by the landlord. The tenant will likely be an unsecured creditor and may only recover a fraction of the debt or nothing at all.
This could be important where landlords are obliged to repay rent or other sums when a lease ends, for example, by a tenant exercising a break option.
Common types of insolvency
|
Type of insolvency |
Meaning |
Effect |
|
Administration |
A licensed insolvency practitioner (administrator) is appointed to manage the affairs of the landlord with a view to rescuing it. May be preceded by a “Notice of Intention” being filed at court. |
Administrators will take over the landlord’s affairs during the administration. An automatic statutory moratorium prevents action against the company without leave of the court. The centre may or may not be sold. |
|
Liquidation (compulsory) |
Liquidator appointed by the court (usually at the petition of one of the landlord’s creditors) to realise (sell) all of the landlord company’s assets and distribute the proceeds to the landlord’s creditors. Once all assets are realised and monies distributed, the landlord company is dissolved. |
Any legal proceedings against the landlord or its assets will be automatically stayed, and the court’s permission is required to bring or pursue any claims. Landlord company directors have no powers to run the company and are automatically dismissed. The centre will be sold (subject to the tenants’ leases and other interests). |
|
LPA receivership |
LPA receiver appointed by the owner of a charge (chargee, usually a lender) to realise the chargee’s security and obtain repayment on their behalf. |
The LPA receiver will usually manage and/or sell the centre to repay the sums owed. The centre remains the property of the landlord unless/until it is sold, but they have no power to overrule or manage the LPA receiver. |
|
CVA |
Arrangement between landlord and some/all of its creditors – settles landlord’s debts on the terms agreed. |
No direct effect on tenants (unless they were creditors of the landlord). Landlord continues to exist and retains its assets. |
Lisa Stratford is a senior associate in the property litigation team at Irwin Mitchell LLP
