The issue of tenant insolvency is a perennial headache for landlords. The recovery of rent arrears from both commercial and individual tenants is a process that is often far from straightforward.
A landlord’s options will inevitably be constrained by the nature of the insolvency regime: the process for recovering rent from a tenant who has gone into administration, for example, will differ from the process required for a tenant who has applied for bankruptcy. It is important that landlords tread carefully because pursuing a method of recovery inaccurately or unsuccessfully can waive the landlord’s right to forfeit the lease for non-payment of rent. There follows a summary of the courses of action open to landlords who are forced to take action against insolvent tenants, be they commercial or individual.
Many insolvent limited companies choose to apply for a Company Voluntary Agreement (CVA), which arranges for the payment of creditors over a fixed period and at a fixed rate. The agreement must be approved by the creditors who are owed at least 75% of the debt and, if successful, the company can continue to trade subject to the creditors’ approval.
The first step for the landlord is to find out about the company’s intention to apply for a CVA, and he should be notified of this by the supervisor of the agreement. The landlord must be notified of any creditors’ meetings and is free to attend and vote on the matter.
Before a CVA is entered into, however, there is a window of opportunity for the landlord, as he may apply for the company to be liquidated before any agreement is made. Once the CVA has been approved the landlord’s options are limited, although his right to forfeit the lease generally remains. There is legal precedent for a CVA to be overturned if the terms are ‘unfairly prejudicial’ to landlords (see Prudential Assurance Co Ltd v PRG Powerhouse Ltd), but this would inevitably entail spending time and money in court.
When it comes to CVA’s it is therefore essential that a landlord knows his rights, and that he attends any relevant Creditors’ Meetings – otherwise the agreement may be legally entered into without his approval or input.
Another common option for an insolvent company is administration, a route that protects the company from legal action by creditors and prevents anyone from applying for a winding-up order. Control of the company is then handed over to a professional insolvency practitioner.
Commercial Rent Arrears Recovery (CRAR)
Administration can be a serious problem for the landlord because an interim moratorium period comes into effect as soon as the application for an administration order has been made. During this period, and during administration itself, the landlord’s remedies are restricted, as court permission is required to forfeit the lease by peaceable re-entry, begin any court proceedings, take any steps to enforce security, or attempt Commercial Rent Arrears Recovery (CRAR).
The landlord is therefore placed in an awkward position: unable to obtain rent and unable to end the lease without a court application. One option for the landlord is to simply advise the insolvency practitioner of his intent to apply to the court to forfeit or to recover rent arrears, in the hope that the administrator will want to avoid the cost and inconvenience of litigation.
Once again, the landlord should be aware of any creditors’ meetings taking place and should attend and exercise his creditor’s rights. Landlords must be especially vigilant against the threat of the administration selling the business – as opposed to the company – without the approval of the creditors. This would leave behind an insolvent shell in which the covenants in the lease could be unenforceable.
The landlord should also be aware that an administrator cannot retain the property for the administration’s benefit without paying rent, and that any such unpaid rent accrues from day to day and is ultimately payable to the landlord.
Innovate Logistics v Sunberry Properties Ltd
Innovate Logistics v Sunberry Properties Ltd weighed up the ‘need to allow administrators to conduct the administration’ against the right of landlords and other creditors to seek redress, concluding that ‘It is for the applicant seeking leave to show that it is equitable for him to be given leave.’ In other words, a landlord can take action to recover rent during a period of administration but must be able to make a compelling case for his right to do so.
A landlord’s options are less limited when a company goes into receivership, either through the appointment of an administrative receiver by a floating charge holder or under the Law of Property Act. In either case, the appointment does not limit a landlord’s ability to sue for rent, forfeit the lease, or attempt CRAR. It is a legal requirement that the landlord is notified of the appointment of an administrative receiver.
In the case of voluntary winding-up, the landlord should not normally be overly affected, as the company must be solvent for the winding-up to proceed. Nonetheless, the order does not affect the landlord’s ability to recover rent or forfeit the lease. It should be noted, however, that another creditor or the liquidator can apply to the court to stop any such action by the landlord.
When it comes to a compulsory winding-up the situation can be rather more complicated. The landlord is restricted in his ability to exercise CRAR after the order has been given, and is likewise unable to begin an action for rent without the leave of court. There is a window of opportunity for the landlord to attempt rent recovery before the order is given, but once again another creditor or liquidator can apply to halt the process. The situation is much the same for forfeiture, in that the same window of opportunity exists with the identical caveat that the process may be halted by application from a creditor or liquidator. Leave of court is once again required for rent recovery after the order has been made.
Where an insolvent company might apply for a CVA, an insolvent person can apply for an Individual Voluntary Arrangement. The purpose of the arrangement is much the same: to organise the fixed repayment of creditors. The landlord will be notified by the individual when the application is made, and from that point onwards should be aware that the court has the power to stay any legal proceeding or action for rent. Once the order has actually been granted, the landlord once again needs the leave of court to begin any proceedings against the tenant.
When an individual tenant files for bankruptcy, or when a creditor presents a petition for a bankruptcy order, the landlord must make haste because options are severely limited once the order has actually been given.
While the order is pending, the landlord can attempt to sue for rent, forfeit the lease, or exercise CRAR. The court can stay any of these actions, but the landlord will find the situation becomes more difficult with time. Once the bankruptcy order has been made the landlord ‘Has no remedy against the person or property of the bankrupt in respect of any debt provable in the bankruptcy’ and needs the leave of court to begin any proceedings against the bankrupt. The landlord may, however, be able to forfeit the lease because, as per Christina Sharples v Places for People Homes Ltd, this does not constitute an ‘action’ against the bankrupt which requires court permission. Indeed, the landlord may well find this to be the most favourable course of action when dealing with an undischarged bankrupt tenant.
Tenant insolvency, and the various insolvency regimes that go with it, can be a difficult area for landlords to navigate. It is therefore vital that landlords are up to speed on the relevant legislation, complicated though it may be. Knowledge of the facts, coupled with the ability to move swiftly through legal proceedings, could well be the difference between successful and unsuccessful action against tenants. While no landlord wants to be burdened with an insolvent tenant, it will be reassuring to know that there are many different courses of action open to the well-informed and well-prepared landlord.