Tenant Insolvency and Landlord’s Remedies

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In these difficult times Landlords are increasingly finding their Tenants are experiencing difficulties in paying their rent. Whilst it is always possible for a Landlord and a Tenant to agree a temporary reduction in rent or a change in frequency of rent payment (ie monthly rather than quarterly) in the hope of retaining the tenant this does not always produce the desired result and the Landlord could be left out of pocket.

If the Tenant becomes or is about to become insolvent the Landlord may be able to forfeit the lease and get back possession of the property either by peaceable re-entry or court proceedings for forfeiture. There are a number of procedural restrictions that the Landlord would have to follow. Regardless of the lease terms the Landlord must comply with the statutory and common law rules and limitations on the exercise of this right. If this is the route the Landlord wishes to take it is essential that they obtain legal advice prior to taking this step.

The main advantages of forfeiting the lease through peaceable re-entry are:

• The landlord will obtain possession of the property
• The landlord is free to claim damages from the tenant if they have breached their obligations to hand back the property in the condition required by the lease

The main disadvantages are, however:

• Due to the poor economic climate the landlord may not want to regain possession of the property and have the risk of it remaining untenanted for a substantial amount of time with no rent being received
• A tenant cannot be compelled to apply for relief from forfeiture but a subtenant may make such an application
• If the tenant does make an application for relief from forfeiture the landlord will not be able to enforce the repairing and other covenants until the tenants application has been decided
• If the tenant is insolvent or bankrupt the landlord may be unable to recover the cost of any repairs.
• The Landlord may become liable to pay the non domestic rates

In certain circumstances, where a Tenant has become bankrupt or insolvent the Landlord may have little option in how to proceed depending on which insolvency route the tenant has followed.

If the tenant is a company there are four avenues of corporate insolvency:

1. administration
2. company voluntary arrangement
3. receivership (including administrative receivership); or
4. winding up (either compulsory or voluntary)

If the tenant is an individual there are two avenues available to them:

1. individual voluntary arrangement; or
2. bankruptcy

Administration: if the tenant follows the administration route the remedies of the landlord for the tenants breach of covenant are severely restricted. In order for the Landlord to be able to forfeit the lease the Landlord would need the leave of the court during the interim moratorium or the consent of the administrator or the leave of the court once the full moratorium is in place.

Voluntary arrangement: once the tenant has entered into the voluntary arrangement the terms of the voluntary agreement will determine what remedies the landlord has against the tenants breach of covenant. This is so whether or not the landlord attended the creditors meeting or voted and whether or not the landlord was notified of the meeting. The terms of the voluntary arrangement may be quite wide ranging and can include payments due in the future from the company. However forfeiture is generally available to the Landlord but, again, it depends on the exact terms of the voluntary arrangement.

Individual voluntary arrangement: Once the application for an interim order has been made the court may stay any existing court proceedings and once the voluntary arrangement has been granted the landlord may not bring any proceedings without the leave of the court. The Landlord would need leave of the court to effect peaceable re-entry as soon as the tenant has made an application for an interim order.

Receivership: Even when an administrative receiver has been appointed the landlord is able to issue or continue any court proceedings against the tenant for breach of covenant or they can forfeit the lease either by peaceable re-entry or by application to the court.

Winding up: Whilst the landlord is able to exercise forfeiture and court proceedings against the tenant without restriction during all stages of a voluntary winding up the court may make and order restraining any action or proceeding on the application of another creditor or liquidator. Such an order arguable covers the Landlords right to effect peaceable re-entry. Where the company is compulsorily wound up the Landlord only has until the winding up order is made to forfeit the lease. Once the winding up order is made the landlord would need leave of the court.

Bankruptcy: prior to a bankruptcy order being made the court may stay any action or legal process. As the property of the tenant would become vested in the trustee in bankruptcy following the order being made, arguably the landlord would not need leave of the court to forfeit the lease.

As you can see it is not straight forward for the landlord once their tenant has taken steps (or has steps taken against it) because it has become ,or is due to become insolvent or bankrupt. Arguably the landlord would be better served by trying to assist any tenant through difficult times especially when there is not a plethora of tenants available.

There are of course other avenues available to the Landlord and before the Landlord takes any steps against the tenant it ought to obtain specific legal advice.

If you are experiencing any problems with tenants or require any other legal advice please do not hesitate to call our free legal helpline on 0800-052-3620.

Emma Napper is a partner in our Commercial Property Department and is based in our Bideford office