by Anne Waltham and David Lane
The present economic climate commonly finds landlords confronted with insolvent tenants. The immediate short-term concern will be the likely direct and immediate loss through non-payment of rent, insurance premiums and service charges, which will be a breach of covenant independent of the fact of insolvency. In the longer term, the landlord will be faced with the effect of the insolvency on the capital value of his investment and the future of the property. The landlord may not always be aware how the insolvency affects his remedies. The effect varies depending upon the type of the insolvency and we deal with each in turn. Initially, however, we point out the main features of the various insolvency practitioners who the landlord may encounter. Save where the contrary is indicated, references to statutory provisions are to the Insolvency Act 1986.
Types of insolvency practitioner Receiver
A receiver will usually be either an administrative receiver or a Law of Property Act (“LPA”) receiver. Both act as agent for the company until such time as it may enter into liquidation. The essential difference is that an LPA receiver is appointed over specific assets charged by way of fixed charge, whereas an administrative receiver is appointed by a secure creditor who has a floating charge over all or substantially all the company’s assets. In practice, therefore, landlords of rack-rented properties are more likely to encounter administrative receivers as it would be unusual for a lender to take a fixed security over a rack-rented lease because of its inherent lack of value.
Administrator
An administrator is not to be confused with an administrative receiver; an administrator is appointed by the court following presentation of a petition by the company, or the company’s directors or creditors. An administrator will usually be appointed where it appears that a solution can be achieved which may be more advantageous to the creditors than a winding-up. Alternatively, the court may see it as leading to a more orderly dissolution of the company than immediate liquidation; an administrator has a duty to consult the creditors generally and is not appointed to protect any one creditor.
Liquidator
There are numerous types of liquidation. The most common so far as a landlord is concerned will be either the compulsory winding-up of an insolvent company by the court or, alternatively, the appointment of a liquidator following a creditor’s voluntary winding-up, where again the company will be insolvent.
How are landlord’s usual remedies affected
This raises the question of what are the landlord’s usual remedies when faced with monetary default? A landlord can usually choose between suing the tenant, distraining on goods at the demised premises, forfeiture and, if there is a subtenant, service of a notice under section 6 of the Law of Distress Amendment Act 1908, requiring the subtenant to pay its rent direct to the landlord until the arrears owed by the head tenant have been discharged. The landlord may also be able to proceed against a guarantor of the tenant or any other party which remains liable under the lease, for example, an original tenant, intermediate assignee or guarantor of any such party, all of which are joint and severally liable to the landlord. The landlord can choose to proceed against one or more liable party.
The landlord and receivership
Receivership does not substantively affect any of a landlord’s usual remedies against the tenant. Thus, a landlord can sue for rent arrears, distrain against the company’s goods (even though those goods may have been charged to the appointing bank — Re Marriage Neave & Co [6] 2 Ch 663, serve notice on any subtenant under section 6 of the 1908 Act, or forfeit the lease if, for example, rent is not paid or the forfeiture clause specifies receivership as a ground for forfeiture.
The practicalities may well be bleaker than the theory. Unless the receiver is seeking a licence from the landlord to assign the lease or wishes to retain the property, in which event the arrears may be paid, it is unlikely that a landlord’s claim will otherwise figure very prominently in the receiver’s list of priorities.
As to forfeiture, a landlord should think long and hard before determining the lease if the premises will be hard to relet and especially if other remedies (for example, against an original tenant) are available.
If the only realistic option is to bring the lease to an end, then, from the landlord’s point of view, it may be simpler and cleaner to do so by accepting a surrender. This would avoid the problems caused by the possibility (albeit perhaps remote) of an application for relief. If the lease is protected by registration, the Land Registry will not clear the landlord’s title of notice of the forfeited lease until six months have expired from the forfeiture, six months being generally the period within which an application for relief should be made. The difficulty for a landlord seeking to relet is obvious.
A landlord may also find that a receiver is keen to negotiate a surrender of the lease which he finds worthless. Surrender can only be by consent and the landlord is under no obligation to accede to this request. However, the landlord should be aware that a receiver always has the option of asking its appointing bank to cancel an appointment over a particular property and to release that property from the charge. This would mean the landlord being left to negotiate with the previous directors of the company, in which case forfeiture may well be preferable.
The effect of administration
Sections 10 and 11 impose many restrictions on what landlords can and cannot do. Once a petition for administration has been presented, no proceedings may be commenced or continued, and no distress may be levied against the company’s goods except with the leave of the court or, once the administration order has been made, the consent of the administrator. Equally, while there is no restriction on the service of a section 146 notice, a landlord cannot proceed to forfeit, whether by court proceedings or by peaceable re-entry, without the consent of the court or the administrator — Exchange Travel Agency v Triton [1] BCLC 396.
Despite the apparent inflexibility of the statutory restrictions, if the administrator retains the premises, it is more likely than not that the administrator will pay the rent; if not, then the court is likely to grant the landlord leave to bring proceedings.
Although there is no direct authority, following Triton it is likely that a landlord would require leave to serve a notice on a subtenant under the 1908 Act on the basis that such a notice is a “legal process” against the company’s property within section 10.
The effect of liquidation
Whether the winding-up is voluntary or compulsory, the landlord will rank as an unsecured creditor and will have to prove in the liquidation for unpaid rent falling due before or after commencement of the winding-up. The claim can extend to future rent payable under the lease. If, however, the liquidator retains possession of the property for the convenience and benefit of the winding-up, then the landlord will recover the full rent for the premises for the relevant period as an expense of the winding-up — Re ABC Coupler & Engineering Co (No 3) [9] 1WLR 702.
In a compulsory winding-up, there are a number of statutory restrictions on the landlord’s freedom of action. If a petition has been presented, the court can stay any action or proceeding against the company, which will include an action against the tenant for rent arrears (section 126), and any distress commenced after the petition has been presented is void (section 128). Then, once the winding-up order has been made, by virtue of section 130, no action or proceeding can be continued or commenced against the company or its property without the leave of the court. The court will usually be unwilling to give leave where the landlord would benefit to the exclusion of other creditors, but it is likely to allow a landlord to complete a distress which was commenced before the liquidation. Landlords should also be aware that if they have been sufficiently astute to have successfully levied distress on the company in the three months preceding the date of the winding-up order, then, by virtue of section 176, the goods distrained upon, or the proceeds of sale, are subject to a potential charge in favour of the company’s preferential creditors, to rank pari passu with the landlord’s interest.
In a voluntary winding-up, these rules do not apply, but the liquidator or any creditor of the company can apply to the court under section 112 to stay any proceedings (including a distress). The landlord’s rights under the 1908 Act are not affected by the tenant’s liquidation.
As to forfeiture, the basic rules are not affected, but the landlord may have an additional ground of forfeiture because of the liquidation of the tenant. The rules are varied slightly by section 146 (10) of the Law of Property Act 1925. Put simply, a section 146 notice has to be served only if the right of re-entry is enforced within one year of the liquidation, or if the tenant’s interest is sold within that year. Relief from forfeiture is available only during that year also. Effectively the liquidator is therefore given a year in which to dispose of the property; thereafter, he has no right to apply for relief from forfeiture.
It is likely that, in a compulsory winding-up, the landlord must obtain the leave of the court to forfeit by peaceable re-entry as well as by proceedings. Triton concerned a tenant in administration, but comments in the judgment indicate that leave probably is also required in a compulsory liquidation.
Disclaimer
One additional weapon that any liquidator has is the ability to disclaim a lease. The rules for disclaimer are obtained in sections 178 to 182 and are complex; this article contains only a brief explanation. Perhaps the leading analysis of the law is Warnford Investments Ltd v Duckworth [8] 2 All ER 517.
A landlord can force the liquidator’s hand by requiring him in writing to decide whether to disclaim and the liquidator then has 28 days in which to give a notice of disclaimer (but the court can extend the period). Failure to do so means that the liquidator loses the ability to disclaim.
The liquidator disclaims by serving the requisite notice on the landlord (and any undertenant and mortgagee) and the disclaimer will then take effect provided no application is made to the court for a vesting order within 14 days unless the court confirms the disclaimer following such application.
If the insolvent company was an original tenant, then the lease disappears and reverts to the landlord. The liabilities of any surety also disappear on the basis that they cannot guarantee something which does not exist. It seems, however, that obligations often imposed in modern leases on the surety to take a new lease in the event of a disclaimer survive.
If the insolvent company is an assignee, then only the assignee’s liabilities and those of his surety disappear and the lease goes into abeyance without an owner until a vesting order is made. The original tenant and any intermediate assignees remain liable to the landlord. A former tenant who is liable for the rent may apply for a vesting order under section 181, vesting the lease in him.
If there is a subtenant and the headlease is disclaimed, the subtenant will, in practice, be able to remain in occupation for the term created by the sublease so long as the landlord has no ground for forfeiting the headlease. In those circumstances, a landlord may be well advised to apply to the court to force the subtenant to take a vesting order; if the under-tenant refuses, he will be excluded from all further interest in the property. In these circumstances, the landlord will be able to ask the court to make the vesting order in his own favour.
Conclusion
It is clear that there are pitfalls in whatever type of insolvency the landlord encounters. In practice, the landlord would always be well advised to review the title deeds to see whether any other party is liable under the lease, such as an original tenant or an intermediate assignee who has covenanted directly with the landlord for the residue of the term or alternatively the guarantor of any such party or of the insolvent tenant. This is a remedy which continues to astonish many former tenants who find themselves liable under a lease which they disposed of many years previously. It may, however, be the simplest and easiest way for the landlord to maintain his income flow in the short to medium term and may well prompt an assignment of the lease back to the party who is now, in practice, liable and who will then at least have control of the further disposal of the lease to someone who everyone hopes is solvent.
