In his latest Coffee Break Briefing webinar, Frettens’ own Insolvency Guru Malcolm Niekirk looked at tenants in liquidation and outlined the options for both landlord and liquidators.
This is the summary of that briefing.
If you'd like to watch the webinar back, you can do so below, if not, read on for our summary...
Quick Links
- Landlord and tenant law - a refresher
- Landlord's options if tenants go into liquidation
- Liquidator's options for tenants in liquidation
Landlord and tenant law – a refresher
Ownership of land and title
In England and Wales, ownership of land comes under two title categories: perpetual titles, which last pretty well forever, and temporally limited titles, which have a time limit on them and may be fixed term or periodic.
Perpetual titles
Perpetual titles are essentially the Crown and freeholders, and occasionally commonholds. Technically speaking all land belongs to the Crown. Even if you own a freehold you are still tenant from the Crown.
And, there are circumstances where a freehold can disappear and revert back to the Crown. The most common of these is bona vacantia which can happen when a company is dissolved when it still owns land.
There’s also escheat which is like bona vacantia but worse!
Temporally limited titles
These are leasehold titles – land that is tenanted. You could be a tenant, sub-tenant or a sub-under-tenant.
Other occupiers of land are licensees or trespassers; neither have ownership of land.
Commercial leases
Broadly there are three types of commercial leases:
Long leases – These are fixed terms of perhaps 50 years or longer, on a low ground rent only, and are likely to have a premium (capital) value and be good security for loans.
Short leases – These are typically on fixed term of 15-25 years, at a full market rent, with regular rent reviews and little premium value.
Periodic tenancies – May be short fixed-term tenancies (e.g. 12 months)
The usual parties
The usual parties involved in a lease are always the landlord and the tenant, and often also a guarantor for most commercial leases.
It can be more complicated than that, especially if the tenant has been assigned the lease or there is a sub-tenant; for example.
Most commercial leases don’t give the tenant the right to give notice and vacate the premises before the lease comes to an end.
Assigning leases
Some leases do have a break clause, but in the absence of this a tenant must either wait for the lease to come to an end or assign it to a new tenant.
Let’s assume that the tenant here instructs an agent who finds a new tenant and the new tenant has a director who is willing to be guarantor for the premises. The tenant will usually have to ask permission from the landlord to assign the lease.
The landlord will check the ‘alienation clause’, which sets out what requirements the landlord can ask for if the tenant wants to assign the lease, then vet the new tenant and vet the guarantor.
Limited guarantees
Before the landlord grants consent, assuming that is the case, they will likely ask for a limited guarantee from the tenant. The landlord is entitled to ask the tenant to stand by their covenant to pay rent, to a limited extent, even after the lease has been assigned.
The landlord may also ask for the guarantee from the guarantor to continue in a similar way.
The landlord will certainly ask for the new tenant to give covenants to be bound by the lease so that there is a direct contractual commitment from the new tenant to perform the obligations in the lease, as well as a written guarantee from the new guarantor.
Only once all of this is in place will consent be granted. This process often takes a long time.
Alienation clauses
These clauses define the landlord’s right to refuse permission for lease assignment.
Generally speaking, there are two types of alienation clauses: one that gives the landlord the absolute right to refuse consent (without a reason) and one that gives them the limited right to refuse consent (only if there is a good reason to do so and the landlord must not prevaricate).
Limited right alienation clauses are more common. Tenants may pay more rent for more freedom to be released from the tenancy when they need to move out.
Landlords’ options if tenants go into liquidation
What should the landlord consider?
If their tenant has gone insolvent, the landlord may be wondering:
- How much they’re owed
- Whether they have any other security
- How easy or difficult it might be to re-let the premises
- Whether they have other plans for the site
- And, what their objective is or should be
Let’s look at all of those in turn:
- They’ll likely be owed rent, and potentially other charges such as service charges, maintenance or insurance
- These other charges may be expressed in the lease as being payable by rent, which will give the landlord more options for example in the context of forfeiture
- Does the landlord have a decent guarantee from the director or someone else?
- Have they taken a rent deposit from the tenant?
- If the tenant is liquidation wasn’t the original tenant and was an assignee, the landlord may be able to make a claim
- In terms of re-letting the premises – the landlord will consider whether this will be:
- At the same rent,
- To a new company as a phoenix (if applicable), or
- To another company (completely unconnected, on the open market)
- For other plans for the site, this may include redevelopment or renovation
- The landlord’s objective may be to recover rent arrears, re-let the premises or redevelop the site
How can the landlord influence the course of events?
The landlord will have three main, legal options:
- Forfeiture – for breach of lease covenants (including unpaid rent)
- CRAR (Commercial Rent Arrears Recovery) – for unpaid rent
- Refusing, or granting (with conditions) permission for the tenant to assign the lease
- This may be reasonable, if the tenant is in default
There are other options. The landlord is likely to be an unsecured creditor with the same rights as any other unsecured creditor.
Critical covenants
There are some critical covenants in most leases:
- Unpaid rent
- CRAR
- Forfeiture
- The liquidation itself
- Forfeiture – but only after a s146 notice
- Other breaches. Examples might be:
- User
- Lack of consent (e.g. to alterations)
How enforcement procedures work
CRAR – for unpaid rent
- CRAR is a statutory procedure
- Landlord must give nearly two weeks advance, written warning
- Bailiffs can seize the tenant’s possessions (at the premises)
- This may itself be enough to secure vacant possession
- What if the premises are sub-let?
- CRAR can divert rent from sub-tenants to the landlord.
- CRAR is not an option with forfeiture (because forfeiture ends the tenancy.)
Forfeiture – for unpaid rent
- There are two procedures, peaceable re-entry and court proceedings
- Landlords don’t have to give any warning before re-entering for rent arrears.
- Forfeiture by court proceedings is treated as immediately effective
- Forfeiture is not possible if the landlord is using CRAR (because that affirms the lease)
Forfeiture – on other grounds
- The landlord must start with a ‘s146 notice’ (a default notice)
- That must give a ‘reasonable time’ for the tenant to put things right
- (Can liquidation – as a lease breach – be put right?
- From there, the landlord may forfeit, either by peaceable re-entry, or court proceedings
- This also ends the lease immediately – so is incompatible with CRAR
Refusal to consent to assignment – if the incoming tenant is unsuitable
- The landlord’s right to refuse an assignment will be set by the lease
- What about breaches of the lease? E.g. the liquidation itself, dilapidations, unpaid rent etc.
- If the new (suitable) tenant will put them right, consent will normally be granted
- What if the new tenant is not suitable? – Consent will be refused!
Liquidator’s options for tenants in liquidation
As liquidator, you have a few ‘blocking tactics’:
- Using administration, rather than liquidation
- Using a protective court order in the liquidation
- Paying standstill rent to the landlord
- Using the Protection from Eviction Act 1977
- Or, another option – disclaiming the lease.
Administration
Where it’s appropriate to use administration instead of liquidation, then even the interim moratorium is effective to stop the landlord from forfeiting the lease or to block CRAR.
This interim moratorium can be thrown up by applying for an administration order or by the company issuing a notice of intention to appoint administrators.
But, administration doesn’t fundamentally change the landlord’s rights it just means that temporarily the landlord can’t enforce the right to forfeit or send in the bailiffs.
If you’ve got a hostile landlord, administration won’t solve anything.
Protective court order
A liquidator can apply for a court order to block CRAR and probably forfeiture. Landlords usually don’t try to levy CRAR once the company has gone into liquidation.
When it comes to restraining forfeiture, a court order of this sort converts a CVL into something that’s almost like a lightweight administration.
But, as liquidator you will have similar issues about having to pay rent as a liquidation expense as you would in an administration. Court orders of this type are very unusual.
Standstill rent payments
Suppose the business needs two or three weeks to finish some work in progress or run a closing down sale. The landlord may allow the company to do that, without interference, on the basis of the rent for that time being paid as an expense of the liquidation. Negotiate!
Protection from Eviction Act 1977
I have known directors to use this, to provide a short-term solution.
It is a criminal offence to force entry into any premises if someone is in occupation. That will be whether bailiffs are trying to levy CRAR or whether a landlord is trying to forfeit.
Suppose a director moves in, to stay in occupation around the clock. That physical occupation can be enough to obstruct the landlord from exercising some of the rights they may want to.
Other options - Disclaimer
Disclaimer isn’t terribly relevant in this context. It is more a technique to assist you in agreeing creditors claims than it is for dealing with the landlord about use of the premises.
We’ll talk about this on another day, in another Coffee Break Briefing!
Upcoming events
Thanks for reading this summary…
Our Second Annual Insolvency Conference is coming up on Friday 12th May! It’s an all-day in-person conference, with Christchurch as the venue.
We’re now accepting bookings for the event so, if you haven’t already, make sure to book on ASAP while there are still spaces.
My next Coffee Break Briefing will be on 5th June, where I’ll be looking at assessing creditor’s claims.
If you’re not already, you can sign up to our email list here.
Specialist Insolvency Solicitors
If you have any questions after reading this article, please don’t hesitate to get in touch with our bright and experienced team.
Call us on 01202 499255, or fill out the form at the top of this page, for a free initial chat.
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