What to Do If A Commercial Tenant Goes Bust

When BHS went into administration in 2016, not much was said about the 164 commercial landlords owed £4 million in unpaid rent, some of whom were also private landlords. Many of the properties were old, in poor condition, and too large for most prospective tenants.

The BHS disaster isn’t unique. Commercial landlords are often in a better position than private landlords since rent is usually paid quarterly in advance and tenants tend to stick around for the long-term. But this isn’t always the case as we’ve seen recently with 17k businesses declared insolvent in Q4 2018, a 6.8% increase on 2018.

As a commercial landlord, it is vital that you are aware of your rights in case the worst-case scenario happens and your tenant goes bust.

Commercial tenants are businesses and sometimes businesses fail. Why this happens is beyond the scope of this article, but let’s take a look at how this unfortunate event affects landlords.

Going “bust” is a broad umbrella. Check how exactly your tenant has gone bust before you proceed further.

1. Have the receivers been called in?

2. Has the owner voluntarily liquidated the business?

3. Is the business being subject to a compulsory winding-up order?

Find out the facts. What happens next will depend on how and why your tenant has gone bust.

Contact the tenant, their administrator or whoever else is in charge. Try not to be too combative. Yes, you’re probably owed money, but have a little empathy here: the tenant is going through a difficult time and probably has a great deal on their plate right now.

Rent Arrears

Most landlords are owed rent when a tenant goes bust, but there may be other liabilities too, such as unpaid maintenance fees. There may also be property damage caused by the tenant. In the case of rent, since commercial tenants typically pay rent quarterly, the arrears can be a considerable sum, especially if the property is in a prime location. Whether you are able to reclaim unpaid rent will depend on the circumstances.

In a voluntary liquidation, for example, the tenant may strike a deal with his creditors (including the landlord) whereby you receive some of the outstanding rent. But if a tenant had been declared insolvent, any unpaid rent is classed as an unsecured debt and you probably won’t receive anything.

When a Tenant Enters Administration

If a tenant has gone into administration or liquidation, seek specialist advice from a property lawyer before you proceed, but the following is relevant.

A 2009 case (Goldacre (Offices) Ltd v Nortel Networks UK Ltd (in administration) (2009) EWHC 3389 (ch)) established that unpaid rent was an expense and landlords must be paid ahead of other creditors. The judgment was further strengthened by the ruling in Leisure Norwich (II) Ltd and others v Luminar Lava Ignite Ltd (in administration) and others (2012) B.C.C 497.

However, under the rulings, advanced rent payments due prior to a company entering administration were not payable, even if an administrator moved in mid-way through the rental quarter. The landlord could put in an unsecured claim, but it was not classed as a priority expense and, therefore, he was unlikely to recover his money. Rent due during a period of occupation by the administrator was payable, even if the administrator left mid-way through the quarter.

Whilst the Goldacre and Luminar cases clarified that the administrator was liable for rent payments during his period of occupation, many landlords were left out of pocket if a company went bust immediately after a quarterly advanced rent payment was due (which happened when Games Stores Group Limited (GSGL) went into administration.

GSGL was due to pay £10m in rent on 25 March 2012 for the upcoming quarter. No money was forthcoming and on March 26, the administrators moved in. Under the Goldacre and Luminar rulings, landlords were classed as unsecured creditors and could basically kiss goodbye to their £10m, even though the administrators were occupying the properties during the period in question.

The landlords, administrator, and Game’s purchaser took the matter to the Court of Appeal to clarify their position with regard to the unpaid rent. On 24 February 2014, judges in Pillar Denton Ltd and Ors v Jervis & Ors [2014] EWCA Civ 180 (Game) delivered their judgment (you can read the full facts of the case here).

It was ruled that landlords could receive payments for the period during which an administrator occupies the property. Rent liabilities accrue on a day to day basis and are treated as an administration or liquidation expense. As such, landlords have a better chance of recovering unpaid rent, as it will be classed as a priority debt, ahead of other provable debts.

The outcome of the GSGL case was a welcome decision for landlords. Previously, many companies went into administration immediately after the rent was due. This meant they avoided paying rent, even when the administrator occupied the property and the company continued to trade while a buyer was sought.

Experts at the time described the judgment as a “commercially sensible decision”.

Insolvency

If an administrator moves in to try and rescue the business, the business might continue to trade during this time, as a buyer or more funding is sought. As we have already discussed, landlords are entitled to rent during any period of occupation by an administrator. However, it’s likely that the administrator will ask you to reduce or even waive the rent to facilitate a sale or help the business continue to trade.

Contact Your Insurer

When the tenant moves out, contact your insurer immediately, to notify them that the property is empty. If you don’t do this, your insurance will be invalidated in the event of a claim.

Forfeiting the Lease

Commercial tenants often sign up for long leases. It’s added security for both parties. It is common practice to have a clause that allows the landlord to forfeit the lease if the tenant accrues rent arrears or becomes insolvent, voluntarily or otherwise. Once the lease is forfeited, the landlord can regain possession of the property.

Be aware that you can’t forfeit the lease when the tenant company has entered administration or is the subject of compulsory liquidation. If this happens, you must apply for permission from the court, administrator, or liquidator, but remember, seeking permission from the court to exercise your right of forfeiture will cost you money.

If the administrator is not occupying the premises and the business is no longer trading, they should agree to the forfeiture of the lease. However, be aware that if you forfeit the lease, you lose the right to claim for future unpaid rent. So, if you later discover the tenant has caused significant damage to the property after the lease has been forfeited, you can’t ask the tenant to pay up.

Note: a landlord can waive his right of forfeiture, for example, if an insolvent tenant agrees to pay rent.

Before exercising your right of forfeiture, always seek specialist legal advice.

Regaining Possession of the Property

It’s not always wise to seek repossession of a commercial property if your tenant has gone bust. Obviously, if the tenant has stopped paying the rent, you might want to evict them, but if the administrators have moved in and are trying to sell the business as a going concern, you will be entitled to rent, even if it’s not the full amount. It could also be the case that a new owner has been lined up who wants to move in and continue.

There is an argument that says some money coming in is better than nothing. Bear in mind also that an empty commercial property is subject to business rates after a three-month grace period.

Some properties attract extended relief from onerous business rates. These include listed buildings and warehouses. Check with your local authority to see if your property is eligible for additional business rate relief.

Weigh up your options and decide whether it’s worth regaining possession of the property.

Rent Arrears

Tenants sometimes go bust with no warning, but in most cases, the writing was on the wall for a few months before it all went south.

Be very wary if a tenant is late paying their rent. Rent arrears, even if the rent is only a few days late and the tenant has a plausible excuse, indicate cash flow is not as healthy as it should be.

Look out for signs the business is in trouble. Are they running sales every few days? Does the place look dead when it should be heaving with customers?

If you’re worried, arrange a meeting with the tenant to see if there is anything you can do to help. Perhaps a rent discount for a few months might ease their cash flow crisis. Be flexible and understanding. It’s in both of your interests to find a way to manage the situation.

Seizing a Tenant’s Assets – Commercial Rent Arrears Recovery (CRAR)

In April 2014, the CRAR scheme was put in place to allow commercial landlords to seize assets and stock to sell, so they could try to recover unpaid rent. However, unlike the old scheme whereby landlords could pitch up unannounced and seize assets and stock, they must now give seven days’ notice before they, or their agent, visits the premises to exercise their right to CRAR.

This means you can’t show up one evening and remove all the single malt whiskey from a tenant’s bar on the basis he owes you rent and it’s super stressful!

In most cases, it’s not worth using CRAR unless the business cannot be saved. Also, seven days is plenty of time for a tenant to remove any valuable assets and put them well out of reach of a landlord and his agents.

Preventing Problems

To prevent issues, always take extra care when accepting a commercial tenant. Vet each prospective tenant very carefully.

How Long has the Business Been Established?

If a business has been operating for 5+ years, it’s in a much better position than a relatively new business. Data shows that 60% of businesses fail in the first three years; if you accept a new startup as a tenant, you have to factor in the risk that the business will go bust.

Is the Business in a High-risk Niche?

Some business areas are a higher risk than others. Hospitality businesses like bars and restaurants have a high churn rate. More than 1,400 restaurants closed their doors for the final time between June 2018 and June 2019. Not even high-profile names like Jamie Oliver are immune to the “casual dining crunch”.

Are its Financials in a Healthy State?

It is wise to run a few basic checks on your tenants from time to time. Visit the Companies House website and download a copy of the company’s accounts.

Does the Business Have a Good Reputation?

Renting an office to a business with thousands of bad reviews is unlikely to end well. Even if they do pay the rent on time each month, it probably won’t be long before a disgruntled creditor applies to have the business liquidated.

Ask for a Reasonable Deposit or Guarantor on the Lease

It is wise to ask for a six months’ deposit. This will provide a measure of protection in the event a tenant goes bust. Landlords can draw down the deposit and use it to mitigate unpaid rent. This is allowed under the ‘unlawful preference provisions’, as per the Insolvency Act 1986.

Listen to your gut. If you have any misgivings about the business or accepting them as a tenant means costly changes need making to the building, consider whether it is in your best interests to offer them a lease.

And, finally…

We hope this overview of what happens when a tenant goes bust has been useful. Please be aware, however, that insolvency and other matters pertaining to commercial leases and the law are extremely complex and no two cases are the same.

Always seek specialist legal advice from a property lawyer if your tenant goes bust or you suspect they are having financial problems. It is very important that you take the right steps to mitigate your financial losses without falling foul of the law.

If you have any comments or questions, please connect with us on Facebook or Twitter. We’d love to hear more if you have gone through any of the scenarios discussed above.

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