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Tenant Insolvency in Scotland

"Help! My tenant is in administration, what can be done?"

Unfortunately, in the current recession, the above question is asked regularly and as a landlord you need to know what rights and remedies you have when a tenant becomes insolvent.

Exercise the Landlord's Hypothec

A landlord's hypothec is a form of real security over the moveable property (including stock, etc.) which (a) belongs to the tenant and (b) is situated within the let premises at the point of insolvency.

The effect of the hypothec is that those moveable items (or their net realisable value) are to be applied to the satisfaction of the landlord's claim for all unpaid rent equally with those claims of other secured creditors and in preference to the claims of ordinary creditors. It doesn't apply to future rent.

The hypothec may have a significant effect on the level of recovery by the landlord for his outstanding arrears of rent. The hypothec arises automatically by operation of law and the landlord need not commence court proceedings to enforce his available rights.

However, it is advisable for a landlord to intimate in writing to the Insolvency Practitioner (IP), as soon as reasonably practicable, that he intends to claim or enforce his rights arising by virtue of the hypothec.

At the very least, we would suggest that reference to the hypothec should be included in any response to any claim form issued by the IP which will typically request details of any "security" held by the landlord.

When intimating the hypothec to the IP it is advisable also to request that the IP produce details of the inventory of stock taken upon his appointment together with any valuation of the goods owned by the tenant within the premises.

Payment of Rent as an Expense of an Administration

The IP is under no obligation to pay arrears prior to their appointment. A claim would need to be submitted to the IP.

In some cases, the IP will try and rescue the company and maximise the return for creditors and may continue to trade from the premises after their appointment.

There have been a number of recent cases which have given rise to a significant opportunity for landlords to have their rent paid as an expense of an administration. This opportunity arises where the IP continues to occupy or retains all, or a significant part, of the premises for the benefit of the administration.

Therefore, it is prudent for any landlord in Scotland, upon his tenant being placed into administration, to write immediately to the IP to ascertain whether he intends to continue to occupy, use or retain possession of the premises and, if so, to confirm that the rent will require to be paid by the administrator in accordance with the terms of the lease as an expense of the administration. Failing this confirmation from the IP, an application to the Court might be necessary.

Terminating the Lease

Unfortunately, a landlord can't change the locks upon a tenant becoming insolvent (as much as he might like to!). The landlord will need to have regard to the terms of the Lease and insolvency legislation.

When a company becomes insolvent, a moratorium is automatically imposed which stops the landlord from raising court proceedings against the tenant without permission from the court or the consent of the IP.

It is becoming commonplace for the IP to seek to sell the assets of the business to a third party who would then be granted a licence by the IP to occupy the premises. In that scenario, the landlord can raise an action against the illegal occupier which wouldn't require the consent of the IP or the Court.

Conclusion

In the current climate, landlords should take action immediately when a tenant defaults in paying rent – delaying any action could be costly in the event of insolvency.

If you require any further information about tenant insolvency, please contact Philip Knight.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Philip Knight

Associate

I work within the Commercial Litigation and Real Estate litigation teams and cover both our Edinburgh and Glasgow offices. I have cases in the Sheriff Court, the Court of Session and the Supreme Court.