These are hard times for the high street and as pressures increase on the business community, commercial property landlords are dealing with the spectre of tenant insolvency. So what rights and restrictions are there for recovering rent from a tenant in administration? Here’s what you need to know ...
Many household names have gone into administration in recent months and sometimes this has been a preliminary step in an already agreed sale of the business (so-called "pre packs"). By putting the company into administration, the business, under its new ownership, can be protected from liabilities that have already run up, including rent arrears, and liabilities for dilapidations.
In other cases, the administration is the last step to try and save the business and avoid liquidation. The administrator will be looking for a buyer to produce the best outcome for the creditors of the business. The immediate consequence for landlords is that they cannot take steps to recover the rent, including forfeiting the lease or instructing bailiffs, without firstly obtaining permission from the administrator, or from the Court. It would be unusual for the administrator to give permission if it intends to use the premises to keep the business going, and the Court is unlikely to grant permission if the administrator can show that allowing the landlord to forfeit the lease would prejudice the administration.
However, if the administrator wishes to use the premises for the purpose of the administration they should pay the rent at the daily rate for the period they use the premises as an expense in the administration. This won't help the landlord to recover arrears but will at least stop the arrears increasing. If the administrator is not offering to pay the rent then this strengthens the landlord's case to ask for permission to forfeit.
In a pre-pack case, the administrator may propose an assignment of the lease, or a new lease to the new company which has bought the business, usually at a lower rent. The new company may well have been let into possession of the premises by the administrator. This is likely to be a breach of the provision of the lease and the landlord could forfeit but would need permission to do so. The landlord is entitled to full information about the proposed new tenant, in order to decide whether to grant a licence to assign or agree a new lease. It is, in the end, a commercial decision whether or not to agree to the new tenant and much will depend on the likelihood of being able to let the premises to anybody else, and the liability for unoccupied business rates. Unless there is a real likelihood of being able to let to a new tenant with a better covenant at a higher rent, it may be that accepting the new company is the best way for a landlord to cut its losses.
On the other hand, if the landlord has a good tenant lined up at a higher rent than the new company is offering the landlord may have a strong case for being given permission to forfeit and take back the premises.
Are you a landlord looking for advice? If you have a tenant who has gone into administration, and you’d like to seek advice on the best way forward, please contact the Dispute Resolution team on 0330 0947777.