We have seen some big high street names fall in recent weeks. It remains to be seen what impact the UK's EU referendum decision will have.
What if one of those businesses affected was one of your tenants? How does a tenant's insolvency affect your ability to deal with your asset?
First it is important to understand the type of insolvency:
Company Voluntary Arrangement (CVA)
A CVA is an arrangement with creditors that compromises the company's debts to those creditors.
Where the company is a chain store retailer, its leases tend to play a major part in the CVA. Typically, some leases will be terminated with compensation paid to their landlords, some leases will have their rent reduced, and some leases (of the better located properties) will simply switch to monthly payment.
A CVA is binding on all unsecured creditors if at least 75% of unsecured creditors by value vote in favour. The company's landlords will have a vote to the extent they are owed current arrears at the date of the creditors' meeting.
Administration allows for the reorganisation of a company or the realisation of its assets under the protection of a statutory moratorium. This prevents creditors from taking action to enforce their claims against the company during the administration process, which would impede the company's rescue or asset realisation.
Liquidation is a procedure through which the assets of a company are realised and distributed to creditors towards the debts they are owed. Following the end of liquidation, the company is dissolved.
Will you get your rent?
In a CVA, the rent payable will depend on the terms of the CVA itself. Often the CVA provides for a rent reduction.
In an administration, the administrators must pay rent while they retain possession of the premises for the benefit of the administration. The rent is treated as accruing from day to day. So if the administrators occupy the premises for 60 days of a rent quarter, and then vacate, they only have to pay 60 days' rent.
In a liquidation, rent is payable as an expense if the liquidator is using the premises for the benefit of the liquidation.
What can you do if the tenant isn't paying the rent?
Tenant in a CVA: this will depend whether the tenant is in breach of the terms of the arrangement.
Tenant in administration: you will need consent from the administrators or permission from the court before you can:
- sue for the rent;
- send in bailiffs to exercise Commercial Rent Arrears Recovery (CRAR – the modern version of distress); or
- forfeit the lease, either by court proceedings or by peaceable re-entry.
Your rights in a liquidation depend on whether it is a "compulsory" liquidation (following a court order) or a "voluntary liquidation" (following a vote by creditors).
Tenant in compulsory liquidation: there is an automatic restriction on proceedings. You need the court's permission before you can sue for rent, exercise CRAR or forfeit the lease by court proceedings. The legislation does not specifically say whether you can forfeit by peaceable re-entry and there are arguments both ways.
Tenant in voluntary liquidation: your enforcement rights are generally unaffected unless the court orders otherwise. So you can sue for the rent, exercise CRAR or forfeit the lease - either by court proceedings or peaceable re-entry. However, the liquidator, the company itself, a creditor or certain other parties may ask the court to suspend any proceedings.
In either form of liquidation, you can serve a 28-day notice on the liquidator requiring them to decide whether they wish to disclaim the lease. If they elect to disclaim, this brings the lease to an end and you will get the premises back. If they do not, then rent is likely to be payable as an expense of the liquidation, giving you some priority over other creditors.
It is also worth considering whether you have any of the following rights available:
- Are there any guarantors or previous tenants who are still liable for the rent? For example, under an authorised guarantee agreement (AGA)?
- Is there any undertenant from whom you can recover the rent direct, bypassing the insolvent head tenant?
- Is there a rent deposit?
Can you negotiate a surrender with the tenant, or its administrator/liquidator, possibly for a premium?