Administration is the process used by a company or limited liability partnership (LLP) if that organisation is in debt and unable to repay it (insolvent). It does not matter whether the creditors number one or many. Administration can happen to all sizes of organisations, for example, former retail giant BHS.
As part of the process an Administrator (a professional insolvency practitioner) is appointed. That Administrator:
- takes control of the organisation and its assets
- notifies Companies House and any creditors of their appointment and publishes a notice in The Gazette
- holds creditor meetings
- tries to rescue the organisation to stop it from being liquidated (wound up) OR, if that is not possible, uses the organisation’s assets to repay as much debt as possible
Administration will therefore impact on all aspects of the organisation’s business, including the lease and use of any commercial premises.
So, as a Landlord of premises when your tenant is in administration, what are your options?
(1) Is the lease continuing?
(a) If the administrator is using the premises
Sometimes the administrator will want to carry on using the premises to carry on trading or for any other purpose connected to operating the business (such as storage). Where this happens, then the rent due under the lease will still be payable. However, the good news is that in these circumstances the rent would be considered to be an administration expense, which gives it a priority status and means it is paid before most of the other creditors.
(b) If/when the administrator stops using the premises
If the administrator does not want to carry on using the premises then any rent due under the lease is still payable, but it is no longer an administration expense. This means that it will not have same priority status as an administration expense and is an unsecured debt, grouped with all the other unsecured, non-priority creditors.
(2) Bringing the lease to an end
(a) Forfeiture of the lease
Most lease agreements contain a clause enabling the landlord to take possession of wholly commercial property (forfeiture) where rent is not paid or the tenant is insolvent. Forfeiture brings the lease to an end which means that the landlord can take back possession of the premises, but no future rent will be due or paid under that tenancy.
However, if a landlord wishes to exercise this option it’s important not to do anything which acknowledges the potential future existence of the lease, such as accepting rent.
With forfeiture, provided the rent is overdue by the period agreed in the lease (usually 14 or 21 days), the landlord is usually able to exercise their right of peaceable re-entry. However, where the tenant is in administration the landlord can not do this until either the administrator or the Court consents to the forfeiture. A 1992 case of Atlantic Computer Systems Plc provides guidelines as to when the Court should give its permission.
Once a landlord has the appropriate permission our specialist team at Able Investigations and Enforcements can take physical possession of premises on behalf of landlords.
(b) Surrender of the lease
In some circumstances the administrator may want to bring the lease to an end and will try to reach an agreement regarding this with the landlord (surrender).
Are there any other options to recover rent arrears?
If the premises are sub-let, then it may be possible to claim rent from the sub-tenant requiring them to pay rent directly to the landlord rather than the administrator.
A landlord may also be able to explore the option of rent recovery from a former tenant (where the lease has been assigned) or a guarantor. Again, a landlord in this situation may benefit from reading about the Commercial Rent Arrears Recovery (CRAR) process. As enforcement agents, Able Investigations and Enforcements are able to take control of a tenant’s goods for sale and recovery of rent arrears.
What if the tenant subsequently goes into liquidation?
Liquidation means that a liquidator can “disclaim” the lease which
- ends the tenant’s obligations under the lease
- enables the landlord to make a claim under the Insolvency Act for the loss of future rent. However, this is as an unsecured creditor – a non-priority debt
There are different types of insolvency – for example, if your tenant is a sole trader/individual (bankruptcy or an IVA [Individual Voluntary Arrangement]) this provides landlords with different rights to recover rent or take possession of commercial premises, sometimes without the need for the consent of the Court or insolvency specialist involved.
If you are a landlord, Able Investigations and Enforcements can assist you with all aspects of recovering rent and taking possession of your commercial premises. For an initial discussion call us on 0845 3707 401.