Administration - What does it mean for Landlords and Tenants?

Although the green shoots of recovery are beginning to be seen across the UK, some businesses are still struggling. This can pose problems for commercial landlords (where the tenant is suffering financial difficulties) and also for tenants if their landlord faces insolvency. 

Here we look at the implications to both parties if either goes into administration, a formal insolvency procedure where an insolvency practitioner is appointed to trade the business until a buyer can be found or the assets sold off.

Landlords: What if your tenant is in administration? 
 

It is important to understand your rights in each of the following potential scenarios:

1. The business continues to trade from the premises.
You can continue to collect rent as an expense of the administration and the lease continues as before.

2. The premises are not required by the administrator.
It is questionable in this case whether you will be able to collect rent. This has been addressed by the Courts on a number of occasions and there is no clear answer. If you cannot collect rent as a landlord you are also (during the administration) prevented from exercising your usual powers to:

• distrain for rent,
• enforce a secured rent deposit or
• forfeit and bring the lease to an end.

However you can ask the administrator for permission to exercise your powers and if he refuses you can apply to the Court to secure these remedies, which will put pressure on the administrator who will not want to incur litigation costs.

3. The business is sold either by way of a ‘pre-pack’ to the existing shareholders or trade sale.
Often in this case the purchasing company is then granted a licence to occupy the premises at a licence fee equal to the rent in order to be able to continue the business.

The Courts recently recognised such arrangements as legal even if the grant of the licence contravenes the terms of your lease. The arrangement (in that case) benefited all the creditors and the landlord was not prejudiced. As a landlord you may have concerns about this but at least rent will be paid and you can formalise the arrangement at a later date.

Tenants: What if your landlord is in administration? 
 

The aspect of the administration procedure which can cause the most problems to anyone dealing with an insolvent company is the moratorium. This means that no legal action can be taken against a company in administration without the consent of the administrator or the permission of the Court. But where does this leave a tenant that wants to renew its lease if its landlord is in administration?

In a recent case involving supermarket chain Somerfield, the High Court had to consider the tenant’s position where its landlord had gone into administration. Somerfield had wanted to renew its lease and served notice requesting a new tenancy on the landlord. The landlord wanted to redevelop the property and served a counter notice so Somerfield applied to the Court for a new lease.

The landlord then went into administration. This meant that Somerfield needed the consent of the administrator or the permission of the High Court before it could proceed with its application for a new lease. The administrators refused consent so the case went to the High Court where the judge granted leave for Somerfield to pursue its lease renewal proceedings.

This case is important as it shows that the courts will not automatically allow an administrator to rely on the moratorium. Unusually in this case, Somerfield benefited from the other party’s insolvency. If the landlord had been solvent, it may have been able to establish grounds to prevent the tenant from getting a new lease. However, as a company in administration, the landlord could not prove its intention to redevelop and the moratorium was the only way it could have prevented the tenant from getting its lease.

So maybe your landlord becoming insolvent isn’t always bad news.

For more information on this or any other Landlord or Tenant matter, please contact Jonathan Kay, Caroline Hanratty or Jennifer Lewis.