Commercial property solicitor, Nick Arthur, looks at a commercial landlord’s rights if a tenant goes bust.
If the tenant of commercial premises encounters financial difficulty, then there are likely to be important issues for the landlord to consider. For most landlords their priority will probably be recovery of the premises so they can re-let it to a new tenant as soon as possible, with minimum disturbance to their rental income. However, it is important for landlords to appreciate that there are legal processes that must be respected.
Before embarking on any action, it is recommended that the landlord should establish the full facts as these could have an important bearing on their rights. The term ‘gone bust’ covers a number of scenarios. So, find out precisely what has happened. Has an insolvency practitioner been appointed, for instance? Or has a winding up order been made?
Before a commercial property can be re-let, the existing lease will need to be terminated. One way of achieving this is to agree with the tenant (or their insolvency practitioner) for the lease to be surrendered. During negotiations for the surrender of a lease the landlord may also be able to raise with the tenant (or their guarantor) any outstanding arrears. Although commercial landlords are often in a better position than their residential counterparts because rent is usually paid quarterly in advance, substantial arrears can nevertheless build up. The issue of dilapidations can also be addressed as part of these negotiations.
Landlords may wish to consider disclaimer of the lease by the tenant’s trustee in bankruptcy (or liquidator) where one has been appointed. Disclaimer will release the tenant from their liabilities under the lease, but it doesn’t prevent a landlord from pursuing any guarantor.
Another option is forfeiture of the lease. Commercial leases often contain a clause which allows a landlord to forfeit the lease if the tenant becomes insolvent. However, tenants may apply to the court for the forfeiture to be set aside, which could cause costly delays. There might also be problematic issues with forfeiture where there are attempts to rescue an insolvent tenant. As with all these options it is important that the landlord seeks specialist legal advice before any steps are taken.
Complications can arise where a tenant enters an Individual Voluntary Arrangement (IVA) or a Company Voluntary Arrangement (CVA). Landlords may find themselves having to agree to changing the terms of the lease, or even reducing the rent.
If a tenant abandons the premises leaving property behind, then the landlord should take steps to deal with that property in accordance with any term of the lease that addresses this scenario, and liaising with any insolvency practitioner that has been appointed.
From a practical point of view, if the lease has been registered against the Landlord’s title then you would want to ensure that the title has been closed and any entries relating to the lease have been removed from the Landlord’s title. It can be difficult for a Landlord to make an application in retrospect and can cause issues when granting a new lease in the future.
For more specific guidance on a commercial landlord’s rights if a tenant goes bust, contact commercial property solicitor and partner, Nick Arthur. It is important to seek specialist legal advice at an early stage so that you can take full advantage of the options that are available to landlords in this situation.
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