David Eminton and Lucy Andrews | 29th September 2021

A commercial landlord’s options in the face of tenant insolvency

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David Eminton and Lucy Andrews | 29th September 2021

A commercial landlord’s options in the face of tenant insolvency


Since March 2020, the UK Government has implemented a variety of provisions, restrictions and allowances which are intended to contend with the high number of COVID-19 cases and the pandemic’s economic fallout. Even now, despite that the majority of the restrictions faced by the UK public have now been lifted, we are still far from ‘normal’ with some businesses only just thinking about encouraging a gradual return to offices (with many employees having spent a full eighteen months working from home) and furlough support only subsiding on 1 October.

That said, we fast approach 1 October – or ‘D-Day’ as it has been dubbed in our office – which brings the phasing out of some temporary insolvency restrictions. Statutory demands and winding up petitions are due to return – subject to certain caveats until 31 March 2022 including an increase in the threshold winding up petition debt to £10,000 and a requirement for creditors to seek proposals from the debtor allowing 21 days for a response before they can petition.

However, the Government is clear that “the existing restrictions will remain on commercial landlords from presenting winding up petitions against limited companies to repay commercial rent arrears built up during the pandemic… and commercial tenants will continue to be protected from eviction until 31 March 2022”.

It appears that the Government’s approach here is to maintain its unspoken strategy of kicking the proverbial can down the road (the metaphor we first used in our blog almost 12 months ago still applies in much the same way!). Certainly, this attitude, which seems to favour debtor tenants (though of course there are plenty of good reasons behind protecting such tenants during the time when their businesses were affected) as opposed to providing sufficient resources to commercial landlords to enable them to recover vast sums of unpaid rent, remains concerning in light of frequent reports that the UK’s economy is likely to be hit by ‘long COVID’, as creditor businesses face a debt time bomb lurking at the end of the pandemic crisis.

 

Summary of the main temporary measures affecting a commercial landlord

Whilst initially intended for the shorter period of 26 March 2020 to 30 June 2020, subsequent multiple extensions to current property and insolvency restrictions restrict a commercial landlord’s ability to:

  • enforce the right of re-entry or forfeiture of commercial tenancies on the grounds of non-payment of rent, service charges, or any other sum for which a tenant is liable to pay under the lease, from 26 March 2020 to 25 March 2022;
  • use commercial rent arrears recovery (‘CRAR’) by increasing the minimum number of days in which rent was unpaid (457 days’ between 25 March 2021 and 23 June 2021; 554 days’ between 24 June to 25 March 2022), and the landlord may not count VAT or interest when calculating the arrears owed;
  • rely on the tenant’s persistent delay in paying rent to oppose a lease renewal under the Landlord and Tenant Act 1954; and
  • present statutory demands and winding-up petitions until 31 March 2022 in respect of commercial rent arrears which are unpaid as a result of COVID-19.

The Government has also announced that there is to be an entirely new Act of Parliament to deal with the accrued rent arrears of businesses which closed during the pandemic. This is reported to ringfence rent arrears accrued during the pandemic, force landlords to waive or agree long-term repayment plans with their commercial tenants and providing a binding arbitration process in default of such agreements or plans. However, this new rumoured legislation is, at the time of writing, yet to be published.

These measures – albeit temporary, notwithstanding the multiple extensions to the periods during which they are in place – are clearly tailored more toward the protection of commercial tenant debtors.

It is, therefore, easy to think that commercial landlords are left without adequate security or remedies with large amounts of accruing debt owed to them, whilst their tenants edge closer toward insolvency (if not already at that point) – which of course will adversely affect a landlord’s financial position and, in the more extreme cases for those with multiple commercial tenancies, could have the potential to threaten a landlord’s solvency. However, hope is not lost.

 

A commercial landlord’s options in the face of their tenant’s insolvency

If a commercial tenant has proposed, is imminently entering into, or has entered into a formal insolvency procedure, a landlord is generally, subject to lease terms, able to forfeit the lease.

Company Voluntary Arrangements (‘CVAs’)

A CVA is a mechanism by which a company is able to continue trading and settle its unsecured debts under an agreement with its creditors to pay only a proportion of the amount it owes. A CVA is proposed to the company’s creditors for approval and is implemented if at least 75% (by value) of creditors vote in its favour. It binds all creditors who are entitled to vote – including dissenting parties and unknown creditors whose debts are encompassed by the proposed CVA. Dependent on its terms, a CVA can cover a company’s future debts (for instance, future rent).

Until the tenant enters into a CVA, a landlord is able to pursue any other relevant remedies, subject to the temporary restrictions set out above. However, once the CVA is entered into, then the landlord is bound by the terms of the CVA, provided they were entitled to vote – regardless of whether they actually voted or if they were notified of the qualifying decision procedure at all.

A CVA proposal can be a rather daunting document (we in the Corporate Restructuring & Insolvency (‘CR&I’) team have recently reviewed CVA proposals which are hundreds of pages in length), and it is vital for landlords to review the proposals with an open mind and think commercially about the anticipated outcomes of other insolvency procedures, such as a CVL/ CWU (addressed below).

However, we are aware that some CVA proposals are not always drafted to provide a more commercially attractive outcome for a landlord in comparison to an alternative procedure. In some of these occasions, landlords may see their potentially substantial claim for future rent and dilapidations reduced to the notional sum of £1 as a result of difficulties in quantifying such, meaning that their voting powers are similarly diminished.

Whilst it may be possible to challenge the CVA within 28 days of approval on the grounds that it is unfairly prejudiced, there were material irregularities, or on a jurisdictional basis (such that the proposal, or aspects of it, does not constitute as an arrangement under the Insolvency Act 1986).

It is, however, worth mentioning the two recent attempts by landlords to challenge a retail CVA proposal which were, disappointingly, dismissed:

  • Debenhams’ CVA – the High Court rejected four of the five grounds on which the landlord sought to challenge the CVA: that the CVA went beyond the scope of the Insolvency Act 1986 by stating that the landlords did not constitute ‘creditors’ for future rent; unfairly prejudicing the landlords by reducing the rent payable under the lease; landlords were treated less favourably than other unsecured creditors; and inadequate disclosure was given within the CVA which amounted to a material irregularity. Although the Court found that removing landlords’ rights to forfeit leases as a result of the CVA/ CVA related event went beyond the scope of the Insolvency Act 1986, it was not enough to set the CVA aside.
  • New Look’s CVA – the High Court rejected all three grounds on which the landlords’ based their challenge: the CVA proposal it did not constitute a ‘CVA’ within the meaning intended by the Insolvency Act 1986 (i.e. jurisdictional challenge); material irregularities; and unfair prejudice suffered by the landlords.

We strongly suggest that landlords seek early advice from specialist solicitors if they are concerned about the anticipated CVA outcomes – our CR&I team would be happy to review CVA proposals and advise as to their options and prospects of a successful challenge accordingly.

Administration

An administration is a rescue procedure which effectively provides a company time for reorganisation and/or realisation of assets (including external contracts) under a statutory moratorium, during which creditors cannot take action to enforce claims against the company.

The key objectives of an administration are (in the following order):

  1. to rescue the company as a going concern;
  2. to achieve a better result for creditors as a whole than would be likely if the company were liquidated; and
  3. to realise some or all of the company’s property to make a distribution to the company’s creditors (noting, of course, the order of priority of creditors – secured creditors first, then preferential creditors, then unsecured).

Provided that the tenant company in administration continues to use the premises for the purposes of the administration (e.g. trading from it), it will be liable to pay the rent and any other sums due under the lease as an expense of the administration. This will be chargeable at a daily rate for the period the administrators use the property, meaning that these are paid in priority over the administrator’s costs and any distribution of funds to creditors. When the administrators cease to use the property, they may disclaim the lease, meaning that the landlord will be able to install new tenants in place of the tenant company in administration – which in theory may be a better outcome to secure future rental income.

In respect of the rent arrears and other sums which fell due prior to the appointment of administrators, a landlord will need to claim in the administration and, subject to asset realisations, will be paid by way of a dividend distribution which is generally be a percentage of the total debt. There is, however, a risk that the administration may fail and the tenant company may exit via a CVA (as above) or CVL (more details below).

Creditors Voluntary Liquidations (‘CVLs’)

A CVL is an insolvent winding up procedure which involves the members of a company passing a resolution, the company’s creditors voting to liquidate and appoint a liquidator (a licenced insolvency practitioner accountant). The Liquidator, once appointed, is an officer of the court and acts as the agent of the company, and owing specific duties to the creditors.

During the CVL, existing proceedings may be stayed by the court meaning that it is often not advisable for a landlord to pursue an application to recover rent. However, in some circumstances, the current rent may be payable as an expense of the liquidation and, similarly to that of an administration, rank above the expenses of the liquidator and other creditors. This is available, for example, if the rental premises is required to retain stock until the point it is sold. A landlord should take this into consideration particularly when contemplating whether to forfeit the lease. Once the liquidator is finished with the premises, they have the power to disclaim the lease, allowing the landlord to find a replacement commercial tenant and secure future rental income.

Generally speaking, and subject to a landlord’s ability to use CRAR in light of the current restrictions, a landlord shall not be permitted to retain any assets seized through CRAR unless the seized goods have already been sold prior to the start of the winding up.

Compulsory Winding Ups (‘CWUs’)

Unlike CVLs, CVAs are commenced by a creditor presenting a winding up petition to the court, the result of which a winding up order is made and a liquidator is appointed.

If a compulsory winding up is pending, CRAR is void and other proceedings may likewise be stayed by the court. Once a winding up order has been made, commercial landlords will generally need to obtain leave by the court to pursue enforcement action in respect of unpaid rent. As above, in any type of winding up, the commercial landlord will generally not be permitted to retain any assets seized through CRAR unless the seized goods have already been sold prior to the start of the winding up. In any event, the tenant’s appointed liquidator may disclaim liability under the lease, allowing the commercial landlord to find new replacement tenants.

Schemes of arrangement (and restructuring plans)

A scheme of arrangement and a restructuring plan are compromises between a company and its creditors (or any class of creditors) approved by the court and which allows a restructure or reorganisation of its debts. Each class of creditor has the right to vote to approve the restructuring plan (which is approved by 75% in value of creditors voting) or scheme of arrangement (for which 75% of each class of creditor must also vote in favour).

The difference between a scheme of arrangement and a restructuring plan is that whilst each class of creditor must approve a scheme, a restructuring plan can be approved even if one or more classes of creditors vote against the plan (a “cross-class cram down”), provided that the creditors are no worse off than they would have been under a likely alternative insolvency procedure.
Landlords will likely form a separate ‘class’ of creditor unto itself: this in theory means that landlords may have a veto option on a scheme of arrangement. However, if the tenant proposes a restructuring plan, a commercial landlord may find themselves having been “crammed-down” by the other classes of creditors regardless of whether they voted for or against the plan.

Whilst schemes of arrangement and restructuring plans are available to debtors, in our experience these are less widely used. However, we strongly suggest that landlords seek early advice from specialist solicitors if they are in receipt of a scheme of arrangement or restructuring plan proposal – our CR&I team are able to review proposals and advise as to their options, voting rights, and likely outcomes accordingly.

 

Other options for a commercial landlord

Notwithstanding the above, the landlord may have other options to recover the property and outstanding rent, including:

  • drawing on rent deposits in accordance with the terms of the rent deposit deed;
  • calling upon a former tenant or the tenant’s guarantor pursuant to the lease or authorised guarantee agreement, by serving notice under s17 of the Landlord and Tenant (Covenants) Act 1995;
  • recovering rent from an undertenant, subject to the terms of the lease, by serving notice under s81 of the Tribunals, Courts and Enforcement Act 2007;
  • terminating the lease in accordance with a force majeure clause pursuant to the terms of the lease; or
  • forfeiting the lease for reasons other than the non-payment of rent (e.g. breach of other covenant, denial of the landlord’s title, or – as stated above – the tenant’s insolvency).

For further information in this regard, please see our recent blog, Coronavirus and Commercial Leases.

Of course, the majority of these remedies do not resolve the matter of long-outstanding rent due to commercial landlords. In any event, we strongly suggest you seek advice from specialised property solicitors prior to taking any of the above steps.

 

Summing up

In light of the above, despite the Government’s current ‘pro-debtor-tenant’ attitude, a commercial landlord’s rights are not completely limited in the event of a tenant’s insolvency.

Should you or any of your contacts require any guidance with any of the issues highlighted in this blog, please get in touch with any member of our CR&I or Property Litigation teams who would be delighted to assist you.