Legal Information

"A GUIDE TO CORPORATE INSOLVENCY"

Whenever a tenant becomes insolvent the Landlord is faced with a perplexing array of choices. The action he takes will depend on the legal remedies available to him, the state of the market, the value of the property and the precise financial condition of the tenant, such as whether the tenants business is to be subject of a survival plan or is simply to be wound up. The Landlord will be the only creditor effectively making a continuing supply to the insolvent tenant and will be seeking to improve his position by active management from that of an unsecured creditor to one with some priority over other creditors.

There is no standard definition of  "insolvency" in the Insolvency Act and a number of sections have specific tests.

Section 123 of the Insolvency Act 1986 does however, provide that a company is insolvent if:

[a] It is unable to pay its debts as and when they fall due or

[b] The value of the Company's assets is less than the amount of its liabilities into account its contingent and prospective liabilities.

Law of Property Act Receiver

[Commonly abbreviated to 'LPA Receiver" also known as "Fixed Charged Received]

1. Appointed under a fixed charge of the relevant property.

2. Powers limited to those in the Law of Property Act 1925 and any further specified in the charge.

3. Appointed by the lender but agent of tenant until tenant goes into liquidation.

4. Objective - to protect interests of lender through sale of assets specifically charged.   No power to carry on business of tenant.

5. No need to be an Insolvency Practitioner.

6. May be required to vacate offices if an administrator is appointed.

7. No personal liability under the Lease.

Administrative Receiver

1. Appointed under a floating charge of the whole or subsequently the whole of the tenants assets.

2. Powers as specified in the debenture, plus the same powers as an administrator under Schedule 1 of the Insolvency Act 1986. Includes power to use common seal of the tenant.

3. Appointed by lender but agent of tenant until tenant goes into liquidation.

4. Objective - to protest interest of lender by realisation of all tenants assets but subject to interests of preferred creditors, such as Inland Revenue and Customs and Excise. Has power to continue business of tenant to achieve objectives.

5. Will be required to vacate office if an administrator is appointed by the Court - unlikely since one of the primary objectives of the post 1986 debentures is to give the holder of the debenture or any administrative receiver appointed by him the right to block the appointment of an administrator.

6. No personal liability under the Lease even if continues to trade.

Administrator

1. Appointed by the Court on the petition of normally the tenant, its Directors or Creditors and if the Court is satisfied that the tenant is insolvent and one of the statutory purposes set out in Section 8[3] Insolvency Act 1986 is likely to be achieved.

2. Wide powers - Include powers to take possession, manage and dispose of property of the tenant and to carry out the business of the tenant. [Schedule 1 of Insolvency Act 1986]

3. Administrator is an agent of the tenant.

4. Objectives - to fulfil one or more of four statutory purposes stated in the Insolvency Act 1986 including:

   • The survival of the tenant as a going concern or

   • A more advantageous realisation of the tenant's assets than would be effected by 
     liquidation.

5. Section 10 and 11 of the Insolvency Act 1986 give effective moratorium from date of the petition until the end of administration order protecting tenant from pressure by creditors.

6. Not appointed to protect one creditor but duty to consult creditors generally.

Liquidator

1. Appointed - by the Court in compulsory liquidation usually on petition of a creditor - by the tenant or its creditors in voluntary liquidation.

2. Wide powers - include power to sell tenants assets without sanction by Court. [Schedule 4 Insolvency Act 1986]

3. Objective - to take possession of assets, dispose of property, pay creditors and wind up the company.

4. Liquidators have the power to disclaim onerous contracts, which will include all usual forms of commercial lease. Liquidator has power to carry on the business of the tenant to achieve a beneficial winding up but the sanction of the Court is required on compulsory liquidation.

5. Landlord can serve notice under Section 178 of Insolvency Act 1986 requiring the liquidator to elect to disclaim within 28 days. The liquidator may in any event elect to disclaim.

6. No personal liability not obligation to protect interest of all creditors.

Commercial Rent Arrears Recovery ('CRAR')

Distress for rent is an ancient common law remedy. It enables a landlord to enter leased premises without notice in order to seize a tenant's goods and sell them so as to recover arrears of rent. Despite its confrontational nature, which may have a negative impact on landlord-tenant relations, distress forms an important part of the landlord's suite of remedies when a tenant is struggling to make payments due under its lease.

However, as part of a wider reform of bailiff law and the rules relating to the enforcement of civil judgments, the government has long been intending to replace the current rules on distress for rent with a new statutory procedure known as Commercial Rent Arrears Recovery or CRAR.

The basic procedure for CRAR is set out in the Tribunals, Courts and Enforcement Act 2007 and the Taking Control of Goods Regulations 2013 which the government introduced at the end of July 2013. The Regulations provide further detail on the mechanics of the new CRAR procedure and are due to come into force on 6 April 2014 .

The Regulations confirm that CRAR will provide a considerably more limited remedy to landlords than the current rules on distress for rent. Some of the key aspects of the new regime are highlighted in the box and described below.

Lease must be in writing

CRAR applies to all leases (whether legal or equitable) of commercial premises, including tenancies at will. The lease must though be evidenced in writing.

CRAR will not therefore apply to licences to occupy, and is expressly stated as not applying to tenancies at sufferance, which arise when a tenant continues to occupy premises after its lease has expired, but without confirmation from the landlord that it is willing for the tenant to remain.

Commercial premises only

CRAR only applies to commercial premises. The Act is quite restrictive in its interpretation of what will constitute commercial premises and CRAR will not be exercisable if all or any part of the premises is lawfully let, under-let, or used as a dwelling. Landlords should be particularly careful with mixed-used premises demised under a single lease. For example if a tenant occupies a shop premises with a residential flat above the lease will not be of commercial premises.

If a tenant or a sub-tenant uses all or part of the premises as a dwelling in breach of the terms of the lease or a superior lease, then CRAR will still apply. This is designed to prevent tenants from attempting to avoid CRAR by allowing a third party to live in, in breach of the headlease.

Only applies to rent

The landlord can only exercise CRAR against rent (plus any VAT and accrued interest). This represents a significant change from the old rules, in which distress could be exercised against any payments reserved as rent under the terms of the lease. Therefore, it will no longer be possible to exercise distress in respect of other sums such as service charges or insurance.

The amount of arrears must be capable of being calculated with certainty and must be equal or greater than a minimum amount of seven days' net unpaid rent. The 'net unpaid rent' is the amount of rent in respect of which the landlord intends to exercise CRAR, less any VAT and interest and any deductions or set off that a tenant may be able to claim.

It is important to note that the minimum amount of net unpaid rent must be present both when the landlord serves notice of its intention to exercise CRAR (see .4 below) and also when entry is made onto the premises to take control of the tenant's goods. The landlord must therefore ensure that the net unpaid rent remains above the minimum level before entering the premises.

Key aspects of CRAR

• Lease must be in writing
• Commercial Premises only
• Only applies to rent
• Landlord must give seven clear days' notice in writing before entering the Premises to seize goods;
• Notices to sub-tenants to redirect rent will only take effect fourteen days after service.

Landlords must give notice in writing before entering tenant's premises

A landlord must give the tenant not less than seven clear days' notice in writing if it intends to visit the premises and take control of any goods belonging to the tenant. Once the notice period has expired, entry into the premises can be affected on any day of the week, but only between the hours of 6am and 9pm (the current rules allow entry onto the premises at any time).

The requirement to give notice may prove to be the most controversial aspect of CRAR, as the current rules on distress for rent allow landlords to enter leased premises without any prior notice. The seven clear day period could give some tenants the opportunity to remove goods from the premises and, in practice, may mean that CRAR will only be truly effective against tenant's running single site operations or with business models which prevent the quick movement of goods to alternative locations.

If a landlord considers that a tenant may deliberately remove or dispose of goods during the notice period, a landlord can apply to Court for an order that shorter notice of period can be given, but the mechanics of how such an application will work are as yet unclear (presumably it would be made without notice to the tenant). Regardless, applying for a reduced notice period will impose a considerable administrative and cost burden on the landlord.

New procedure for redirecting rent from sub-tenants

As opposed to seizing a tenant's goods, where premises are sub-let a superior landlord can also seek to recover arrears of rent under Section 6 of the Law of Distress (Amendment) Act 1908. Section 6 allows the superior landlord to serve notice on any sub-tenant(s) requiring them to redirect rents to it whilst its immediate tenant remains in arrears.

Landlords will be relieved that CRAR preserves this useful remedy, but it will introduce a new notice procedure. Importantly, a notice to pay rents directly to a superior landlord will only take effect 14 clear days after it is served on the sub-tenant, as opposed to immediately as is now the case. A landlord will need to consider the implications of this where rent payments under a sublease are structured differently and/or made at different times to those under the headlease.

Peaceable Re-Entry to Forfeit Lease

The Landlord can employ Bailiffs to effect peaceable re-entry subject to service of notice pursuant to Section 146 of Law of Property Act 1925 for breaches other than non-payment of rent. Relief from forfeiture not available following service of Section 146 Notice where re-entry completed before summons for relief issued by tenant, sub-tenant or mortgagee. Successful re-entry will crystallise rights against original tenants and assignees and may crystallise rights against all guarantors. Where Section 146 Notice not required [i.e. for non-payment of rent] tenant, sub-tenant or mortgagee may at any time apply to the Court for relief, which may be granted subject inter alia to payments of arrears and cost. Relief unlikely to be granted where landlord has re-let. [N.B. Re-entry, which is not peaceable, may result in criminal proceedings under Criminal Law 1977. Peaceable re-entry is a re-entry not involving actual or threatened physical violence against the occupiers of the premises. Remedy not generally available for residential premises.

Precluded except with leave of the Court or the Administrator as above.

Remedy available for breach of covenant to pay rent on voluntary or compulsory liquidation. Available on voluntary liquidation for breaches other than failure to pay the rent, but doubtful whether available on compulsory liquidation. Available on voluntary liquidation but liquidator may apply to the Court for relief.

Alternatively, a landlord seeking possession can serve notice requiring liquidation to elect within 28 days whether or not to disclaim lease.

Court Proceedings for Possession

Remedy available and can include proceedings for other sums due to landlord and reserved as rent. Can be pursued simultaneously with or independently of action for possession. Can also be pursued simultaneously with action against original tenant, assignees or guarantors. Judgement may execute over any property of the tenant wherever situated in England and Wales.

Precluded except with leave of the Court of the Administrators as above. Rent may be payable as expense of administration. Seek professional advice.

Precluded in case of compulsory liquidation except with leave of the Court [Section 130 Insolvency Act 1986]. Rent may be payable as expense of liquidation where liquidator is trading from the premises or is attempting to market the premises.

Action Against Original/Former Tenants

Original tenant liable as original contracting party to pay rent and perform covenants for the contractual term of the lease until expressly released. This liability is not affected by any variation of the rent or terms of the lease, unless of such significance that the variation operates as a surrender and regrant. Former tenants liable at common for the period during which the lease is vested in them. Covenants in a licence to assign would usually impose obligations on the assignee similar to those of the original tenant, i.e. for the remainder of the term. The liability will not be affected by a disclaimer of the lease by the liquidator of the current tenant. Guarantors of original and/or former tenant may still be liable dependent upon the terms of their covenants and whether they have expressly or impliedly released. [N.B. An original/former tenant who has been required to pay rent may apply to the Court for a vesting order under Section 181 Insolvent Act 1986, vesting lease in him.

Remedy Against Sub-Tenants

Landlord can serve notice pursuant to Section 6 Law of Distress Amendment Act 1908 requiring payment of rent due direct to landlord. Sub-tenant may serve similar notice to protect his under lease and/or his goods and pay rent direct to the superior landlord. Landlord's notice must specify the arrears due from the tenant and a fresh notice will be required once those arrears have been paid. LANDLORD CAN PHYSICALLY DISTRAIN DIRECTLY ON SUB-TENANTS GOODS.

Precluded except with leave of the Court or the Administrators as above. Landlord can still physically distrain on sub-tenants goods.

Remedy available as for tenant in receivership except that leave may be required to serve a Section 6 Notice after compulsory liquidation. 

Action Against Guarantors

Liability of guarantor or surety is limited to the debt from the tenant. Guarantors liability is contractual and will therefore, depend on a strict interpretation of his covenant. The liability may be either that of a principle [when it will not be affected by the tenant's insolvency event] or more usually as a guarantor [when it will be the same as that of a tenant]. Guarantor's liability may be extinguished on a material variation to the lease to which he is not a party. If guarantor does not pay, landlord may enforce as a debt due.

As for receiverships, administration, except in case of disclaimer. If liquidator of current tenant disclaims this will also crystallise liability of the guarantor for current tenant, but will not affect any guarantor of a previous tenant. Normal guarantee covenant will provide for guarantor to take up a new lease.

Calling Upon Bank Guarantees

Contractual liability normally limited as to amount, time scale and leasing remaining vested in named tenant. May be affected material variation of the lease or disclaimer by liquidator but will depend upon the terms of guarantee. Bank guarantee will normally be payable on demand where the tenant has defaulted. The bank guarantee may impose preconditions before payment can be demanded which would cause difficulties in the case of administration or liquidation, although this is rare.

Calling Upon Rent Deposits [three possible types]

[a] Separate Account not charged

Rent may be paid from deposit

Deposit may be caught by floating charge.

Deposit is asset of administration - cannot be drawn down.

Deposit is asset of liquidation - cannot be drawn down. If deposit is drawn down after presentation of petition for compulsory liquidation, it will be reclaimed by the liquidator.

[b] Separate Account but Charged and Duly Registered at Companies House

Rent may be paid from deposit

Rent deposit cannot be drawn down with leave.

Rent may be paid from deposit.

[c] Paid to Landlord Absolutely but Tenant Entitled to Repayment on Terms.

Rent may be paid from deposit