31 January 2018

Asset Management Q&A

Yesterday - all my tenant's troubles seemed so far away, but now are they here to stay?

The recent liquidation of Carillion is a stark reminder that even the biggest companies can fail. Every day seems to bring further worrying news about well-known retailers and restaurants, many of whom have large leasehold property portfolios.

Company insolvency can have a major impact on a wide variety of people. In this note, we explore some of the issues arising for landlords where retail/leisure tenants are placed into formal insolvency/rescue procedures. The most common processes applied to retail and/or leisure tenants are a company voluntary arrangement (CVA) or administration.

Key concerns for landlords are protecting an income stream and maintaining control. The impact of an administration or CVA will vary in each case but there are some general points to keep in mind when hearing of a tenant's troubles.

1. Will rent be paid?

Administration – Yes, if the administrator uses the premises for trading the business, rent has to be paid as an expense of the administration. This means the administrator has to pay the rent ahead of most other claims. Rent will only be paid for any period of use and can be paid in arrears. Early conversations with an administrator are sensible to get a feel for how the property fits in with their plans. Arrears before an administration are unsecured claims payable out of whatever sums are available to unsecured creditors.

CVA – Yes, but probably at a reduced level. CVAs frequently reduce the amount of yearly rent and can change when payment is due. Leasehold premises may be categorised (A, B, C etc.) depending on how viable they are to continue trading from in the long term. The lower the category, the more likely rent will be heavily reduced.

2. What can I do if there are arrears of rent?

Keep in mind that others could be liable for arrears. A direct guarantee (for example by a parent company) may have been provided when the tenant took on the lease. For pre-1996 leases, review if there are any former tenants (or their guarantors) that may be good for the money. For leases granted in 1996 or later, the most recent previous tenant may have provided a guarantee (AGA). The AGA may have been guaranteed by the previous guarantor.

The terms of any guarantee should be checked to make sure any conditions of making a claim are satisfied. When seeking to claim against a former tenant (or their guarantor) a statutory notice must be given within 6 months of the rent being due. If the tenant has sub-let, an option is to utilise a statutory procedure to direct the sub-tenant to pay rent directly to its superior landlord (you) instead of its immediate landlord (the tenant). Depending on its terms, a landlord may be able to draw down on a rent deposit in an administration or CVA (subject also to the terms of the CVA).

Administration – The statutory moratorium prevents action being taken (including forfeiture, debt claims and CRAR) without the Court’s or administrator's consent. If the administrator is using the premises, but not paying rent, that would assist any application to the Court for permission to forfeit the lease. Alternatively, an application can be made to Court for an order compelling the administrator to pay the rent. Bear in mind that seeking consent of the Court takes time so is rarely used in practice.

CVA – For larger companies there is no moratorium but CVAs are likely to prevent landlords taking enforcement action for pre-existing arrears while the business gets back on its feet. Depending on the terms of the CVA, there may be scope for taking steps to recover unpaid rent that’s due during the CVA.

3. Will the tenant be free to assign or sub-let?

Administration – The alienation provisions in the lease still apply and dictate what an administrator can/cannot do.

CVA – Whether the alienation provisions in the lease are impacted will depend on the specifics of the CVA and should be checked.

4. Can I force the lease to an end and take back control?

Administration – Forfeiture requires either the Court's or administrator's consent. The Court or administrator are unlikely to grant consent if the premises are being used and rent is paid. This is because the Court will consider the impact on all creditors, not just the landlord. The Court process can take time but if the administrator has no use for the premises, it may consent to the lease being forfeited or offer terms for a surrender. Terms are likely to be favourable to the tenant but will give a landlord the opportunity to source a new tenant.

CVA – Entering into a CVA is normally a breach of a lease that gives a landlord the right to forfeit. A CVA usually provides such a breach is waived. They often have a mechanism to enable the landlord to direct the tenant to surrender the lease, allow it to be forfeited or to assign the lease to a new tenant. Be alive to any time limits imposed for starting this process in a CVA.

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