For landlords, dealing with insolvent tenants can create significant challenges, particularly in the case of corporate tenants. Such tenants can cause disruptions to rental income streams and create uncertainties. As a landlord, understanding your rights and options is crucial to mitigate risks and protect interests. This article delves into the rights granted to landlords during various insolvency processes, as well as the benefits and drawbacks associated with them.
Administration
If a company goes into Administration, an Insolvency Practitioner is appointed to manage its affairs and realise the company’s assets, with the goal of optimising the payout to creditors. Administration triggers a moratorium, which places a protection around the company. This means that a landlord cannot take any legal action without going through the Court.
Should the company choose to remain in the premises beyond the Administration date, the rent may be settled as an expense from the Administration estate. However, to prevent further liabilities, the landlord may want to contemplate accepting a surrender of the lease in such circumstances. This will enable the landlord to rent out the property again and secure a new tenant.
Alternatively, the Administrator may assign the lease if the company is sold as part of a pre-packaged Administration. In these circumstances, it is advised that the landlord obtains legal advice and considers potentially negotiating any supplementary conditions as part of the assignment. Although the Administration process allows for the potential restructure of the company’s operations and possibly protecting the lease and rental income for landlords, landlords have restricted control over the process and decisions are made by the Administrator with the creditor’s best interest in mind.
Creditors’ Voluntary Liquidation (CVL)
Shareholders typically resolve to place the company into liquidation and appoint a Liquidator which is subsequently agreed with creditors. In most cases, the company will have ceased trading before entering into Liquidation.
Similarly to Administration, if the company decides to remain in the premises, the rent expenses will continue to incur and is payable as part of the Liquidation expenses. The advantage of a CVL process for Landlords is that the Liquidator may look to disclaim the lease on their appointment which will provide for a relatively swift resolution. The landlord may issue a claim in the estate for any outstanding rent arrears and future rent liabilities, however, they do have a duty to mitigate the future rent arrears by marketing the property for re-let.
Company Voluntary Arrangement (CVA)
A CVA is an agreement between the company and its creditors that outlines a strategy for paying off the company’s debts over a specific timeframe. The creditors, including the company’s landlords for overdue rent, will have the opportunity to examine the proposals and vote on the proposed agreement.
The implementation of a successful CVA could enable the company to continue its business activities, safeguarding future rental income and allowing the landlord to recover a portion of their previous debt through the CVA’s repayment scheme. However, the amount recovered may not cover the entire sum owed and could result in some debts being written off.
Any continuation of trading will likely require renegotiating the lease terms which may not be as advantageous as the previous ones. Landlords are recommended to initiate early communication with the Insolvency Practitioner upon receiving a CVA proposal.
Compulsory Winding Up (CWU)
The CWU process is overseen by the Court, which will issue an order to place the company into Liquidation. Landlords have similar rights and consideration as in a CVL, such as any rent arrears that are outstanding and future rent obligations can be claimed within the Liquidation estate. Any distributions from the Liquidation estate will depend on the realisation of assets in the Liquidation and will be distributed based on the order of priority under Insolvency legislation.
Ultimately, landlords’ rights vary depending on the insolvency process undertaken, each offering advantages and disadvantages. Early engagement with the Insolvency Practitioner is advisable in all circumstances in order for the landlord to consider the implications on their rental income and rights. In addition, seeking professional advice can protect their rights and mitigate any potential losses.
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