#3253 - Tenant's Insolvency - Commercial Property

Protection against T’s insolvency

• Forfeiture clause [Clause 7 lease] – expressly granting the LL a right to forfeit upon T’s insolvency. However there are disadvantages =

  • T will have no obligation to pay rent from the date of forfeiture

  • LL may have difficulty re-letting the premises so soon

  • LL may loose the right it has against 3^rd parties [e.g. T1 if lease has been assigned or guarantor] to pay the rent in the event of default.

• Rent Deposit

• Guarantor

• Upon assignment – a rent deposit / guarantor / AGA

• Have detailed check-ups on the financial position of tenant: Try to spot insolvency sooner rather than later by having regular checks.

What can LL claim for:

• Rent in arrears LEADING UP TO the insolvency = LL must claim for these in the insolvency

• Rent / Service charge arising after the start of insolvency = depends on Tenant’s liability:

Tenant’s liability upon insolvency:

Insolvency

• Tenant remains liable in the following insolvency regimes:

• Voluntary arrangements [if the terms provide so]

• Receivership

• Administration where the administrator is not in occupation

• Liquidation where the liquidator is not in occupation

• Guarantor remains liable also! The lease is still active so [deemed a continuing tenancy] and so Guarantor must continue to pay rent [S.178(4)(b) Insolvency Act]. Advise Guarantor to apply for a vesting order [put lease in his own name].

Bankruptcy: [only applicable to individuals]

• Trustee in Bankruptcy becomes liable for further rents after the start of insolvency [there has been an automatic assignment which does not require LL consent]

• S.284(1) IA 1986 – between presentation of Bankruptcy’s petition and property vesting in Trustee, the bankrupt cannot make any disposition of the property [e.g. assign or sublet the lease].

Performance of covenants:

• Insolvency official = not personally liable to perform covenants [e.g. do repairs, observe user covenants]. He is merely an agent of the Tenant. LL has normal remedies against the Tenant.

• Trustee in Bankruptcy = personally liable

Liability if the lease is DISCLAIMED:

• Trustee in Bankruptcy [S.315 IA 2006] AND a Liquidator [S.178 IA 2006] can disclaim the lease as “onerous property” on the tenant’s insolvency. Must act in the best interests of the creditors [nb. Can also use break clause; notice to quit]

• The disclaimer releases the tenant from its obligations under the lease from the date of the disclaimer.

• The disclaimer releases a trustee in bankruptcy from his obligations under the lease from the commencement of his trusteeship.

• The guarantor / third party [e.g. joint tenant] remains liable [S.178(4)(b) Insolvency Act 1986 / Hindcastle case]. The landlord can either sue the guarantor or make him take up a continuing tenancy or a NEW lease [clause 6.1.2.2 = new lease for the remainder of the term]

• However, if LL takes possession of the property – it will be treated as if the LL had successfully forfeited the lease [liability of guarantor will end]

• Sub-tenancies = the sub-lease is NOT terminated; The disclaimed head-lease is treated as still being in existence until LL chooses to forfeit it. So the superior landlord does not become the sub-tenant’s landlord.

  • There is no privity or contract or estate between superior LL and sub-tenant.

  • LL has to forfeit the headlease [e.g. if sub-T is not paying rent or not observing covenants]. Until this point of forfeiture the Sub-tenant has a continued right to occupy under the sub-lease.

  • If sub-tenant is obliged to pay more rent under the headleast – he can reclaim the difference in the insolvency.

Vesting Orders

A third party [e.g. guarantor / sub-tenant / mortgagee] paying the rents under a disclaimed lease may apply for a vesting order – to put the lease in his own name

The court has a discretion over whether to make a vesting order and if so on what terms

If a vesting order is made - the lease is transferred automatically without the need for further documentation [e.g. not conveyance]

Effect = gives that person CONTROL over the property [e.g. ability to ensure performance of relevant covenants; sell or assign the property if they want to bring liability to a close]

TIME LIMIT = A person making a V.O must apply for it within 3 MONTHS of becoming aware of or being notified of the disclaimer. This period can be extended by the court.

Liability if lease is being Forfeited

Usually lease will give the LL a right to forfeit upon insolvency

Lease – is guarantor still liable? [If the lease is silent then guarantor’s liability ends with tenant’s liability]

Disadvantage =

Once the lease is forfeited – LL cannot seek remedies through guarantor / third party [i.e. cannot make them pay rent or perform the covenants]

May be very difficult to find a replacement tenant

Rates whilst property is empty may be unaffordable

Forfeiture can be a delayed procedure – getting consent from court / Insolvency Official takes time [i.e. peaceable re-entry or by proceedings]

Tenant or insolvency official can still apply for relief from forfeiture [court has wide discretion for this].

Exception: What if lease says guarantor will take a replacement lease if original lease is forfeited?

If LL does decide to forfeit = S.146 notice [the insolvency cannot be remedied so no need to give Tenant a reasonable time to remedy the breach. [T or insolvency official can still apply for relief].

OLD LEASE

1. If the Lease is disclaimed against the assignee:

• Original tenant = continues to be liable- deemed “continuing lease”

• His obligations continue under privity of contract for the WHOLE term

• Guarantor = his liability will be set out in the lease

2. Lease is forfeited against assignee

• Original T not liable because the lease has come to an END

• Original tenant’s guarantor may still be liable however – depending on terms of the guarantee [but it is arguable that the terms...