It is not uncommon for a landlord to receive notification without warning from an administrator of a corporate tenant advising that the tenant has entered into administration.
An administrator is generally appointed to a company in financial distress. The purpose of the administration is to allow an independent qualified person an opportunity to assess a company’s overall financial position to determine whether or not the company can continue to trade or whether it should be wound up.
To provide the administrator with the best opportunity to assess the company’s financial position, the rights available to landlords (and creditors) are restricted. For example, landlords cannot generally terminate a lease or commence legal proceedings to recover unpaid rent within the administration period. Landlords may however receive rent or other amounts payable under the lease from the administrator.
In our view, and from the experience we have had in such matters, a landlord would be best advised upon receipt of notification that a tenant is in administration to proceed as follows in respect of its commercial, industrial or retail lease:
Review lease – have the terms of the relevant lease reviewed to ascertain whether or not the entry into administration amounts to a default by the tenant under the lease.
Sublease arrangements – ascertain if possible if there are any subleases in place granted by the tenant as if so these will require consideration.
Make contact – make contact with the administrator to ascertain the intention of the administrator in relation to the leased premises eg is the administrator intending to disclaim the lease? Note that a landlord cannot, without the consent of the administrator or the court, retake possession of the premises during the period of administration.
Grace period – ascertain whether the administrator is personally liable for payments under the lease. Once the grace period, allowed under the relevant legislation, from date of appointment has expired the administrator has personal liability for rental payments due under the lease for the period from expiry of the grace period whilst the administrator and/or the corporate entity in administration continue to use or occupy the premises.
Check security – check the security held for the tenant by way of bank guarantee or security deposit. As a landlord you are at liberty to call on such security during the period of administration for any losses incurred, for example arrears of rent or outgoings, provided that the lease allows you to do so.
Prepare proof of debt – after having liaised with the administrator, collate details of the losses to the date of administration and potential losses to continue to accrue and lodge a proof of debt at the appropriate time.
End of Administration – at the end of the administration, any personal liability of the administrator to pay amounts owing under the lease will terminate and one of the following will occur:
- The company is handed back to the directors – negotiations will be required to ensure that existing obligations can be maintained. It may be necessary to re-negotiate lease terms.
- Deed of company arrangement entered in to with creditors – if a deed of company arrangement is proposed by the administrator at a meeting of creditors, the landlord should obtain legal advice in relation to its rights under any such deed. Drafting of the deed can be of importance at this point to the rights of the landlord to recover ongoing losses.
- Winding up of company – a liquidator will investigate the financial affairs of the company and liquidator assets for the benefit of the creditors. A liquidator may request funding to assist with investigations or recovery proceedings. Advice should be sought and the commercial viability of the proposed action must be considered. A liquidator also has rights to disclaim a lease if not already disclaimed during the administration.
Termination of lease – as there is a prohibition on retaking possession of the premises during the administration, it should be noted that the lease is not automatically terminated. Once the administration has ended (assuming the corporate entity is not being wound up) formal steps would need to be taken if the lease is to be terminated, usually by way of a breach notice. Obviously there needs to be grounds under the lease to take such action.
Should you have any queries in regards to insolvent tenants or require any assistance please do not hesitate to contact us.