Date:

Essential guidance on landlord and tenant insolvency

The Office for National Statistics confirmed on Wednesday, 25 July 2012, that in the last quarter there has been a further 0.7% contraction in economic activity. Although the UK is expected to come out of its double-dip recession in the next quarter, due mainly to the impending Olympic boom, times are still hard for tenants and landlords alike resulting in an increase in insolvency situations for both parties.

To assist with the uncertainty which will always accompany a sudden insolvency situation we have set out below a straightforward guide, for both commercial tenants and landlords, answering the most important questions which will arise when one of the parties to a lease becomes insolvent.

Guidance for Landlords on a Commercial Tenant’s Insolvency

The three main questions for landlords in insolvency situations are likely to be (1) can I recover any unpaid rent, service charge or claim for dilapidations, (2) can I forfeit the lease, (3) is there any risk of the insolvent tenant disclaiming the lease.

The table set out below responds to these questions based on the different insolvency situations.


























TENANT'S
INSOLVENCY  
                         AFFECT ON LANDLORD
  Can I distrain or sue for rent, or sue for unpaid service charge or dilapidations? Can I forfeit the lease? Risk of disclaimer?
                                COMPANY INSOLVENCY
Company 
Voluntary 
Arrangements
No restriction on landlordunless the company is a small company with a CVA moratorium where the landlord will need leave of the Court Same position as distrain No power  for lease to be disclaimed by insolvency practitioner
Administration Moratorium in place. No enforcement action can be taken until the Landlord has obtained the leave of the Court or the consent of the administrator Same position as distrain No power for lease to be disclaimed by administrator
Administrative Receivership No restriction on landlord Same position as distrain No power for lease to be disclaimed by administrative receiver
LPA Receivership No restriction on landlord Same position as distrain No power for lease to be disclaimed by LPA receiver
Company
Voluntary 
Liquidation
No restriction on landlord to commence action but enforcement action can be stayed by the court. Same position as distrain Liquidator has ability to disclaim liability under the lease
Compulsory 
Liquidation
- Distress proceedings begun before the petition has been presented can continue but action can be stayed by the Court.

- Cannot distrain for rent after the petition has been presented.

- Landlord can sue for rent without leave until order is made but action can be stayed by the Court.

- Once the order has been made landlord must seek leave of the court to distrain or sue for rent.
- No restriction on peaceable re-entry until order is made (when leave is required) although action can be stayed by the Court.

- No restriction on court action for forfeiture until order is made when leave is required. Action can be stayed by the Court.
Liquidator has the ability to disclaim liability under the lease


Another risk for landlords arises in respect of alienation. It is not unheard of for an insolvent tenant to proceed to rid itself of the lease by assigning its interest to a third party, and doing so without the knowledge or consent of their landlord.

If the alienation provisions in the lease are qualified, i.e. assignment is permitted so long as the landlord consents, this consent cannot be unreasonably withheld and there will clearly be issues if the landlord tries to object to having the lease assigned to a solvent tenant, from an insolvent tenant.

However, where there is an absolute prohibition against assignment, the landlord has a number of (limited) options:

He can issue a claim for damages against the insolvent tenant, but this is fairly pointless and subject to the restrictions above; or

He can issue an application for a mandatory injunction against the unlawful sub-tenant but this will only succeed if the sub-tenant knowingly and intentionally induced the breach of the head-lease.

In either situation the landlord does have the option to formally terminate the sub-tenancy but where the assigned lease is protected under the Landlord and Tenant Act 1954 this will involve following the formal procedure under section 25.

Guidance for Tenants on a Commercial Landlord’s Insolvency

The main concern for tenants in insolvency situations is whether their interest is protected. This raises three questions (1) what is the risk of the insolvent landlord disclaiming the lease, (2) and is there a risk of the landlord’s interest being forfeited (where the landlord itself is a tenant and the tenant a subtenant), and (3) is there any other way the landlord can determine the lease.

Disclaimer

As set out in the table above it is only when a company enters liquidation that the risk of disclaimer arises. However, the liquidator’s ability to disclaim a lease is limited to disclaiming any interest in “onerous property”.

Where there is a straightforward landlord and tenant relationship there is an obvious question over whether a lease constitutes “onerous property”. Therefore unless the liquidator can show that the obligations on the landlord under the lease are onerous, or that the property with the lease is not saleable or readily saleable, it seems unlikely that the tenant will be at risk of disclaimer.

The issue becomes more relevant when the insolvent landlord is also a tenant. In this position the head landlord will have the same remedies against the landlord as set out in the table above, including disclaimer of the lease.

In this situation where the insolvent landlord has its leasehold interest disclaimed, the subtenant’s immediate lease is determined. However, the subtenant does not lose its right to occupy the property and essentially the head landlord becomes the subtenant’s landlord. This relationship can be formalised by way of a vesting order to vest the disclaimed lease in the subtenant.

Forfeiture

Forfeiture is also a concern in this situation as the head landlord may have the ability to forfeit the lease of the insolvent landlord which would again determine the sublease. If this situation arises, the subtenant can apply for relief from forfeiture but relief will be granted by way of a vesting order to vest the disclaimed lease in the subtenant.

The head landlord will have restrictions on his ability to forfeit as set out in the table above.

Surrender

The only other risk is where the insolvent landlord agrees a surrender of the headlease with the head landlord. However, in this situation the subtenant is protected as their lease does not determine. Instead, the head landlord steps into the shoes of the insolvent landlord on the terms of the subtenant’s lease.

Graham Dagnall

Partner

I am Practice Group Partner for the Litigation Practice Group. I specialise in corporate litigation, commercial litigation, litigation funding, legal service delivery and practice group management.