20 April 2020

A practical guide for landlords on the impact of a tenant entering liquidation

Despite stimulus packages from the Government, it unfortunately seems inevitable that a large number of businesses will enter liquidation in the short and medium term as the economic impact of the COVID-19 pandemic is felt in nearly every sector.

Below is a practical guide to the mechanics of a typical liquidation, and the rights of a landlord if their tenant is liquidated. Landlords will also need to consider the impact of specific Covid-19 related legislation on their rights and remedies when considering an appropriate course of action.

What is liquidation?

If an insolvent business cannot be sold as a going concern, liquidation acts as a vehicle for selling the company’s assets and winding it up.
There are 3 different types of liquidation:

  • Compulsory liquidation takes place where a company is wound up by a court order;
  • Creditor’s voluntary liquidation- this is where the company’s members pass a resolution to wind up the company; and
  • Members’ voluntary liquidation- here, the directors of a company make a statutory declaration of solvency and then wind the company up following a members’ resolution to do so. This is sometimes referred to as a “solvent liquidation”.

For compulsory liquidation, a statutory moratorium is put in place which prevents proceedings being commenced against the company in liquidation. There is no such moratorium for voluntary forms of liquidation, which will allow a landlord to take forfeiture action or pursue CRAR (taking control of the tenant’s goods in order to satisfy the arrears) if they desire.

Will rent be paid?

Rent will remain payable unless the lease is disclaimed (cancelled) by the liquidator.

The liquidator’s role is to wind up the company. If there are funds available, the liquidator will distribute them in the order of priority outlined below:

  • Secured creditors
  • Expenses of the insolvency process
  • Preferential debts (mainly employee claims up to the statutory prescribed amounts)
  • Ordinary unsecured creditors
  • Interest on preferential and ordinary unsecured debts
  • Postponed creditors, for example shareholders

If the lease is not disclaimed, rent will be treated as an unsecured debt. However, if the premises are used for the purposes of administering the liquidation, rent can then be claimed as an expense of the liquidation and will accrue at a daily rate for as long as the premises is used for these purposes. This is beneficial for a landlord, as liquidation expenses are second in the list of priority.

In relation to rent arrears and other sums due under the lease which accrued prior to the liquidation, landlords without security will again rank as unsecured creditors. The landlord will be asked to submit a proof of debt form, and if there are funds available following the liquidation of the company’s assets they will receive a dividend alongside the other unsecured creditors. Unliquidated sums, such as dilapidations claims, can also be added to the proof of debt form. Unsecured creditors are unlikely to receive the full sum they are owed.

Can the lease be terminated?

The liquidator is free to choose whether to disclaim the lease, which has the effect of ending the tenant’s rights, obligations and interests under the lease.

If landlords require certainty as to whether the lease will be disclaimed, they can to serve a “notice to elect” on the liquidator, which will give the liquidator 28 days to decide whether to disclaim the lease. If they do not elect to do so in this time, the liquidator will lose their right to disclaim the lease.

If the lease is subject to a guarantee, the disclaimer will not impact the landlord’s rights against the guarantor. Depending on the wording of the guarantee, the landlord may be able to compel the guarantor to take a new lease of the premises or step in and fulfil the obligations of the tenant under the existing lease. The landlord will need to ensure that they do not take any steps which could be construed as releasing the guarantor from its obligations (for example, by re-entering the property in a manner which terminates the lease).

If the premises are left empty while the landlord negotiates with the guarantor, it is possible for the landlord to secure the premises by changing the locks without it amounting to termination of the lease if clear notice is given to the interested parties of the landlord’s intention to do so.

Can you force the lease to an end?

The answer to this question depends on the type of liquidation being undertaken.

  • Voluntary forms of liquidation- Where a tenant is in voluntary liquidation the landlord is initially free to exercise any right to forfeit they may have, whether by peaceable re- entry or through Court proceedings. If forfeiture proceedings are underway in Court, the liquidator or another creditor may apply to stay the application.
  • Compulsory liquidation- The landlord may not commence forfeiture proceedings when a winding up order has been made except with the permission of the court, and subject to the conditions imposed by the court. If the landlord wants to bring the lease to an end without applying to the Court, they may be able to convince the liquidator to disclaim the lease, which would have the same effect.

Practically speaking, any landlord seeking to terminate a lease, whether or not their tenant is in liquidation, will need to consider the practical ramifications of forfeiture, paying particular consideration to government stimulus packages for distressed landlords and tenants and the likelihood of finding another tenant in the current economic climate.

Jack is an Associate in our Property Litigation team.

Disclaimer

The current global crisis is evolving rapidly, and the rules and guidance for individuals, companies and other entities to manage its implications are similarly fast moving. Notes such as this may be out of date almost as soon as they are published. If you have any questions prompted by this article or on any other matter relevant to you, please get in touch with your usual contact at Forsters.

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