Responding to corporate commercial tenants in financial difficulty

Responding to the warning signs

As a landlord, the first obvious sign of a tenant’s financial difficulty might be the tenant failing to pay rent, seeking to renegotiate the terms of the lease, asking the landlord to use the rent deposit to meet the rent owed, having third parties pay rent on their behalf, or regularly paying their rent late. However, the commercial realities of current market conditions, and the difficulties of finding a replacement tenant, may mean that a landlord is prepared to allow their tenant some leeway, even with the risk of increasing arrears.

Once a tenant enters into a formal insolvency process the options available to a landlord become more limited. Accordingly, where there are concerns regarding the tenant’s financial position, ongoing monitoring of the position is advisable.  

The tenant’s filings on Companies House might help the landlord assess their financial position. Accounts will show the tenant’s balance sheet. It is also possible to register and sign up for company updates, for example to check for new security being registered and/or changes to the directors.

In addition, the Gazette, where insolvencies are advertised, can be searched and we can undertake court searches to check whether there have been filings with the Court relating to the tenant. These can be regularly run by Russell-Cooke’s restructuring and insolvency team as part of ongoing monitoring of your tenants should you consider it necessary. More detailed financial reports can be obtained through credit check services and investigators.

Usually a landlord will have a rent deposit in place which will secure some of the rent arrears.

However, if there are rent arrears owed by a commercial tenant then landlords can take the following pro-active steps to recover those sums:

• send a formal written demand from solicitors to the tenant;
• utilise the commercial rent arrears recovery (CRAR) process to recover the rent arrears against the tenant’s assets. However, this needs to be balanced against maintaining the right to forfeit the lease as the use of CRAR will act to waive the right to forfeit the lease if one exists;
• issue a statutory demand for an undisputed sum owed by the tenant;
• issue Court proceedings to seek payment of the rent and other sums owed;
• utilise an Authorised Guarantee Agreement if there is one, or enforce any other third party guarantees held.

Some of these may not be available where the tenant is already in an insolvency process.

If the situation is particularly serious then a landlord may wish to forfeit the lease (effectively terminating it) for non-payment of rent and take back possession of the property. Whether the landlord has the right to forfeit the lease depends on the circumstances of the case, the wording of the lease and the sum of rent which is outstanding. Forfeiture is a complex process and legal advice from our property litigation team should be sought if this is being considered to ensure the correct process is followed. 

Administration is a process which tries to save the company so that it can continue trading, or achieve a better result for the company’s creditors as a whole than would be likely if the company proceeded immediately to liquidation.

A tenant can enter administration either by:

1. applying to the court for an administration order; or
2. through the tenant company or its directors filing a notice of appointment at court.

If an application is made to the court there is an interim moratorium in place pending the hearing of the application. A moratorium prevents creditors taking enforcement action against the tenant company.

In an administration the key points are:

• the administrator is required to send notice of their appointment to all known creditors;
• upon their appointment the administrator takes control of the tenant company and all of its assets/property. Their role is to try to save the company as a going concern, get a better outcome for creditors than they would receive in a liquidation, and/or realise the company’s assets for the benefit of creditors;
• once an administrator is appointed (by either route) then a moratorium is in place which prevents creditors taking action against the company. The moratorium means that the options for landlords are more limited. A landlord may be able to exercise CRAR, forfeit the lease, or begin Court proceedings (but only with the permission of the administrator or the Court);
• where the landlord has pre-administration rent arrears, dilapidations and/or other sums owed by a tenant in administration, such sums can be claimed by filing a proof of debt with the administrator. This is a straightforward form which the administrator will issue in which the landlord sets out the sums owed and basis for that debt. If this debt is accepted by the administrator then the landlord’s claim will be paid out of the insolvency estate. Each unsecured creditor will receive returns based on their share of the total debts owed. Actual recoveries will depend on how much is left in the insolvency estate and the other creditor claims filed, and the time this process takes will depend on the complexity of the administration;
• an administrator does not have the power to disclaim a lease. However, if the administrator retains the property and uses it for the purposes of the administration then rent must be paid for the period of such use. The rent incurred must be paid as a priority expense in the administration and ahead of the administrator's own fees;
• an administration automatically terminates after 12 months. The administration can be extended by the agreement of the creditors or by order of the Court;
• the administrator can apply to the Court at any time to bring the administration to a close and can take steps to convert the administration into a liquidation where it is considered appropriate to do so. 

In a compulsory liquidation a creditor files a winding up petition with the Court to ‘wind up’ the tenant company. If the Court agrees that the company is insolvent because the company is unable to pay its debts as they fall due, then a liquidator is appointed to the company. 

In compulsory liquidation the key points are:

• unlike administration, there is no moratorium between the petition being filed and a winding up order being made so landlords can take steps against the tenant in the intervening period;
• once the company is in liquidation the directors of the company lose all powers. The liquidator is the only party authorised to act on behalf of the company;
• the liquidator’s role will be to review the affairs of the company, identify and collect in the assets of the company and distribute those to creditors. The time this process takes can vary depending on the complexity of the liquidation;
• the liquidator may disclaim a lease. Notice of the disclaimer must be provided to the landlord. Alternatively a landlord may write to the liquidator to invite them to disclaim the lease. The liquidator can also surrender the lease and return the keys to the landlord. If the liquidator does not disclaim or surrender the lease and remains in the property, the liquidator will need to meet the accruing rent which will be treated as an expense of the liquidation and paid in priority to other creditor claims;
• as with administration, the landlord should file a proof of debt in the liquidation;
• after the liquidation has completed the company will be dissolved.

This moratorium, named after a provision in the Insolvency Act, provides companies with breathing space from creditors whilst it considers restructuring options.

The moratorium lasts for 20 business days, but can be extended if certain conditions are met. It can also be extended by up to a year if creditor consent is given. The moratorium will come to an end if the company enters another insolvency process.

During the moratorium the directors remain in control of the company day to day. They are supervised by an insolvency practitioner, called a monitor. Once the moratorium is in place the monitor should notify all known creditors and also place a notice on Companies House. The monitor can bring the moratorium to an end if they think the company cannot be saved.

During the moratorium creditors cannot take steps against the company unless they have sought the permission of the Court. This would prevent a landlord from pursuing a claim for rent arrears during this time. However, if the moratorium is extended then the company must pay its rent as it falls due for the duration of the moratorium. If the tenant cannot pay rent during this time then the monitor must bring the moratorium to an end. 

A CVA is an arrangement between a company and its creditors whereby the creditors agree to compromise the sums owed to them, usually with a payment plan and/or a reduction in the debt owed.

The process is started by the directors of the company who will approach an insolvency practitioner to act as supervisor if the CVA is approved. The insolvency practitioner will contact all creditors with the CVA proposal and creditors are able to vote on whether to accept the proposal. The CVA may cover rent arrears and/or future rents owed.

A CVA will be passed if 75% (by value) of the creditors who vote on it approve the proposal. A landlord is bound by the CVA whether or not they vote in favour, but they can oppose the CVA within 28 days.

In a CVA the landlord retains the right to forfeiture of the lease.