Briefings

Real Estate Property Update: Do's and Don'ts in a Downturn

Real Estate Insolvency and Recoveries Real Estate Dispute Resolution

June 2008

With the credit crunch having spread to the wider economy, commercial property landlords are not immune to its effects. Experience has shown us that landlords who know all their legal remedies and act quickly and assertively to enforce them can recover significantly more than those who allow events to dictate terms. As veterans of the early '90s recession, our team is familiar with the actions that need to be taken. Whilst insolvency is a fact of commercial life, every downturn brings more business failures, but the knowledgeable landlord will have a head start in the scramble for whatever is available. We take a look below at some of the 'do's and don'ts' for landlords faced with a tenant in financial difficulty.

Monitoring your Investment

• DO keep an eye on the tenant when it restructures its affairs. In many cases this is a pre-cursor to insolvency, so monitor your tenant for early warning signs such as profit warnings, rights issues, and negative trading statements.
• DO use your most effective remedies if the tenant is not paying rent but is still solvent; for instance be aggressive by serving a statutory demand on the tenant or sending in the bailiffs while you can in order to recover your arrears.
• DON'T allow arrears to mount up in the hope that the tenant's trading conditions will improve.
• DON'T be concerned about bringing the tenant's business down; if it's going to happen, it will happen with or without you.
• DON'T get a reputation for weakness; being a soft touch will relegate you to the back of the queue.

Tactics on Tenant Insolvency

• DO consult your lawyer.
  
• DO know what you want to achieve; initiate negotiations with the insolvency practitioner if you want the property back.
  
• DO challenge any actions of the liquidator, insolvency practitioner or receiver as their proposed actions may be outside their statutory powers and legally unenforceable.
  
• DON'T delay. Experience has shown us that landlords who move quickly and make contact with the insolvency practitioner are likely to maximise their recovery.

Previous tenants

• DON'T forget your remedies against former tenants and guarantors.
• DO serve notice under section 17 Landlord and Tenant (Covenants) Act 1995 on any previous tenant liable under an Authorised Guarantee Agreement in order to protect entitlement to recover arrears of rent, remembering to serve protective notices on the previous tenant during the course of a rent review procedure even if the current tenant is not in arrears.
• DON'T serve a section 17 notice on a former tenant in financial difficulty if there is a better alternative (such as that tenant's guarantor).
• DO remember that receipt of a section 17 notice will entitle the recipient (who pays up) to an overriding lease of the property.

To forfeit or not to forfeit?

• DO think about the implications carefully before taking this step. For the reasons set out below, the decision to forfeit is not as easy as it once was.
• DO remember that you will need to obtain the consent of the administrator, liquidator, or the court, if you want to forfeit the lease of a defaulting tenant in insolvency.
• DON'T waive your forfeiture rights by default through lack of knowledge.
• DO since the period of empty rates relief has been reduced to 6 months for industrial and warehouse properties and 3 months for other commercial properties think very carefully before voluntarily bringing the lease (and therefore the tenant's liability) to an end either by forfeiture or acceptance of a surrender.
• DON'T accept the property back unless you have an immediate use for it since, once it has come to an end, the clock will start ticking against you for the purposes of empty rates relief.
• DO have regard to special considerations that apply when dealing with a liquidator or an administrator, arising out of their statutory obligations and protections.
• DO consider the implications of agreeing to abandon, permanently or temporarily, quarterly rental payments since acceptance of a month's rent on a quarter day will have the effect of waiving the right to forfeit until the next quarter day. It will not stop the other two months' rent becoming payable but these will have to be recovered by distraint (which will be coming under its own statutory regime shortly) until the tenant becomes the subject of insolvency proceedings, or as a simple unpaid debt.

IMPORTANT: This briefing note is only intended as a general statement of the law and no action should be taken in reliance on it without specific legal advice. Release Date: 26 June 2008