In recent years, commercial landlords have been facing one question more frequently than in a long time — what happens when their tenant goes into administration and what rights do they have as a landlord? To answer this question, it is important to first understand what administration is and how this process affects the options open to commercial landlords. It is also important that commercial landlords consider what they can do to prevent having to deal with a tenant in financial difficulty.
An organisation may enter into administration when they are insolvent, ie when they cannot afford to pay their debts as they become due. For a commercial tenant, this includes rent which is a debt payable to the landlord. When a company enters administration, control of the business is transferred to an insolvency practitioner who acts as the administrator.
The administrator will try to achieve a better result for the company’s creditors than would be achieved if the company was simply dissolved. In essence, the administrator will use the company’s assets to pay off its debts to try to escape insolvency. A landlord is a creditor of the insolvent company and the landlord’s interests must be balanced against the interests of all other creditors. But how does this affect the landlord’s rights under the lease?
Administration and the landlord’s rights
When a commercial tenant enters administration, the landlord’s rights depend on whether the administrator still intends to use the premises for the benefit of the administration. If the administrator is in occupation of the premises, rent and rates are still payable and they are given priority status over other debts because they are classed as a cost and expense of the administration.
Previously, the timing of entering administration was relevant to whether or not the landlord was paid by the administration. In a string of decisions, the courts held that rent arrears that had accrued prior to the company entering administration could not be payable as expenses — depending on the circumstances they could only be classed as unsecured debts. As a result, a landlord could miss out on a whole quarter’s rent if a tenant was placed into administration shortly after a rent payment date and the administrator continued to occupy the premises. There were arguments by landlords claiming that tenants could simply delay placing the company into administration to benefit from being able to use the premises rent-free until the next rent payment date.
The recent Game decision appears to have resolved this unfair position and administrators may now have to pay rent as an expense of the administration at the appropriate rate for rent for the duration of any period during which they continue to occupy the premises for the benefit of the administration.
If the administrator is not using the premises the position is less certain and will depend on the facts of the case.
A well-drafted lease will contain a clause which allows a landlord to forfeit the lease should their tenant go insolvent. Depending on what process is used to deal with the tenant’s insolvency, the landlord’s rights may remain unaffected by the insolvency and the landlord may be able to forfeit the lease as soon as the insolvency process is commenced.
In administration, there is a statutory moratorium which prevents the landlord from taking any action against their tenant without the consent of the administrator or without the leave of the court. In practice, if the administrator does not require the premises, they may consent to forfeiture proceedings or simply to a surrender of the lease to mitigate the landlord’s losses by allowing the landlord to re-let the premises.
It is imperative that a landlord seeks legal advice before attempting to forfeit or surrender a lease as they have serious consequences to the landlord’s rights.
How landlords can protect themselves from losses due to tenants in administration
Any tenant who is financially sound generally pays rent as per the lease. Landlords should always carry out thorough due diligence on any commercial tenant before granting a lease to them. This should reveal if the potential tenant has long-standing financial problems which may result in insolvency down the line. Another option is to ensure the tenant provides a guarantor for the lease. Finally, landlords should secure a deposit which can be drawn down against rent arrears if necessary.
The best way to protect yourself against a bad tenant is to take proper precautions before you enter into a lease with a tenant. If you are a commercial landlord and have any doubts about the financial standing of your prospective tenant and require more information about your options, our specialist commercial property solicitors can provide you with the legal advice and guidance you require.
At AMD Solicitors, our expert team of commercial property solicitors in Bristol can offer guidance through the entire process of negotiating and entering into a lease with a commercial tenant. For more information on how AMD solicitors can help your business simply call our team on 0117 962 1205 or fill out a contact form.