Landlords, Tenants and Liquidation
My tenant is going into liquidation – what rights do I have?
Liquidation is the process of winding up a company’s affairs when it has ceased to trade, and realising and distributing its assets to creditors. A company can go into liquidation voluntarily, where the directors decide that liquidation is appropriate, or it can be forced into compulsory liquidation by the court, usually on the petition of a creditor or group of creditors. A voluntary liquidation can be solvent or insolvent. The options available to landlords of tenants in liquidation will depend on the type of liquidation process the company is subject to.
Members voluntary liquidation (MVL)
A company can only be placed into members’ voluntary liquidation when the directors have made a statutory declaration that it is able to pay all of its debts, including statutory interest, within 12 months. As the company may rely on the Liquidator realising assets in order to pay its liabilities, a landlord of a tenant in MVL may be expected to wait for up to 12 months for payment of any outstanding liabilities. Landlords of solvent tenants in liquidation should be aware that the Liquidator has a statutory right to disclaim any onerous property, which in respect of leasehold property will mean that the tenant will no longer be required to pay rent. As this represents a disadvantage to the landlord, the disclaimer brings about the right of the landlord to prove for any loss or damage he has sustained in consequence of the operation of the disclaimer (s178(6) of the Insolvency Act 1986) as an unsecured creditor in the winding up. Landlords should note that the compensatory right claim for loss or damage does not equate to a right to prove for future rents (Re Park Air Services plc), and consequently should seek to protect their position by finding a new tenant as a matter of priority. Nevertheless, within 12 months, landlords can be assured of receiving payment of their agreed claim in full, together with statutory interest, and therefore have no need to consider alternative recovery options which may hinder the progress and increase the costs of the solvent liquidation.
Creditors voluntary liquidation (CVL)/Compulsory liquidation
In an insolvent liquidation, landlords must be aware that unsecured creditors will recover only a proportion of their unpaid debts, and if the company has no assets to realise, there will be no distribution to creditors at all. Consequently, a landlord’s priority must be to secure the property to re-let to a new tenant as quickly as possible.
In a CVL a landlord is entitled to:-
- deduct funds from a rent deposit;
- seize assets in lieu of unpaid rent under the CRAR regime (although this has become increasingly difficult due to the requirement to give notice to the tenant);
- or forfeit the lease by peaceable re-entry (although the liquidator can apply to the court for relief from forfeiture).
In a compulsory liquidation a landlord cannot exercise any of these remedies without the consent of the liquidator or the permission of the court. As in MVL, the liquidator has the right to disclaim onerous property, and the landlord is entitled to claim in the liquidation for loss or damage suffered as a result, but unlike MVL, creditors will receive only a proportion of the total they are owed. In both types of liquidation, landlords can still take action against guarantors and subtenants (eg by serving a section 6 notice), as disclaimer serves only to terminate the company’s obligations under the lease and does not have any effect on the rights or obligations of third parties. Landlords can require the liquidator to decide whether to disclaim (‘notice to elect’). If the liquidator fails to respond within 28 days, he loses the right to disclaim and the company remains liable for the rent.
How can I protect myself against tenant liquidation?
Liability for rates
As they have an immediate right to possession upon disclaimer of the lease, whether or not they actually take possession, landlords will become liable for non-domestic rates immediately on disclaimer. This can represent a significant potential liability, and landlords should therefore take steps to ensure that they seek a guarantor or other surety to the lease to limit their potential exposure in this regard. Forfeiture or surrender of the lease will likewise result in the landlord’s liability for rates, and consequently landlords may elect to re-let the property to a tenant at a nil or substantially reduced rent in order to avoid the liability.
In view of the new Commercial Rent Arrears Recovery regime, which removes a landlord’s right to distrain against a company’s assets without prior notice, commercial landlords need to take further steps to protect against the risk of rent arrears. As well as ensuring there is a guarantor or surety to the lease, landlords should consider obtaining a rent deposit equal to at least six months’ rent as protection in the event that the tenant fails to pay. The rent deposit can be drawn down against rent arrears in a liquidation scenario without falling under the unlawful preference provisions of the insolvency legislation.
If you are a landlord of an under-performing tenant, contact us to discuss your options.
Alternatively, if you are a tenant facing insolvency, contact us immediately for specialist advice tailored to your specific situation.