Tenant insolvency - Landlords' perspective

Tips for Landlords – InsolventTenant

2012 has been a difficult year for commercial tenants with Optical Express, JJBSports, Clinton Cards, Peacocks and La Senza all becoming insolvent. The recent news of loss making electrical retailer “Comet”,going into insolvency last month is another reminder of the ongoing risks commercial landlords face with tenants increasingly becoming unable to pay the rent.

TheUK economy has only recently recovered from the longest recession for over 50years. It is important during such turbulent times that landlords protect their investment and ensure that they are effectively safeguarded if their tenant becomes insolvent and is unable to pay the rent.

There are various issues for landlords to consider in order to be protected from commercial tenants who fall into insolvency and are unable to pay rent:

Forfeiture

A forfeiture clause in a lease allows a landlord to retake possession of thepremises and brings the current lease to an end. Landlords should ensure that that there is an express forfeiture clause in the lease which can be invoked in theevent of the tenant becoming unable to pay the rent. As added protection the event of tenant insolvency should also be expressly listed as grounds forforfeiture under the lease.

Bringing the lease to an end using a forfeiture clause may not be the preferable option fora landlord considering the difficult economic climate. The tenant occupying thepremises may simply be facing temporary financial difficulties and could possiblybe able to pay the outstanding rent at a later date. If the lease is brought toan end by way of forfeiture then finding a new commercial tenant may also takea long period of time. It goes without saying, during this time the property willremain empty with no rental income.

However landlords are often reluctant to bring leases to an end where there are partieswho have agreed to act as guarantors to the lease. This is because when a leaseends, guarantors are released from all liability owed to the landlord. It isfor this reason landlords will often allow rent payments to remain outstanding andaccrue because then they will still have the option to pursue the somewhat unfortunate guarantor for these rent payments.

Guarantees

When entering into a commercial lease with a tenant, landlords should ensure that the lease clearly requires the tenant to give details of parties who can act as a guarantor. Under a guarantee arrangement the landlord may gain an enhanced level of protection if the tenant fails to meet their rent obligations underthe lease. The guarantor will have to fulfill the tenant’s failure to meet its obligations.

A guarantee can be given by the tenant company’s parent company or alternatively a personal guarantee can be given by a director of the tenant company. If however the guarantee has been given by a company, then if this guarantor company becomes insolvent then the landlord will not be able to pursue this guarantor and recover the unpaid rent. A personal guarantee extends to the personal assets of the individuals acting as guarantor and is the preferable option. Thereis no maximum limit on the number of guarantors which can be required.

If the tenant subsequently sells the lease on to a purchaser (commonly known asassignment) the liability of the guarantor will cease and a commercial landlord will not be protected.

Authorised Guarantee Agreements (AGAs)

Onassignment when the tenant sells the lease to a purchaser, the tenant needs to ensure that the outgoing tenant has entered into an AGA. Even though the outgoing tenant will no longer be situated at the property, by entering into an AGA the outgoingtenant will remain liable to the landlord if the purchaser fails to pay the rent.

An AGA will also protect the landlord if the tenant becomes insolvent and goes into liquidation. Without an AGA the parties dealing with the tenant's liquidation (the liquidators) may able to “disclaim”the lease, which would have the effect of releasing the tenant from all liability under the lease.

Outgoingtenants aware of their potential liability under an AGA may have issues with entering into such an arrangement. In these situations the landlord should ensure that the assignment is conditional upon the outgoing tenant agreeing to provide an AGA.

Rent Deposit 

Whena lease is granted or assigned a commercial landlord will enter into a rentdeposit deed with the tenant. This deed governs the control which both parties have over the rent deposit and the circumstances in which the landlord can make withdrawals. A rent deposit deed will usually provide that non-payment of the rent is a ground for withdrawal.

Landlords should ensure that the rent deposit deed is drafted so it allows for the registration of the rent deposit deed as a charge at Companies House. The effect of registration of a charge is that if the tenant goes insolvency, the landlord will be a secured creditor and receive protection against liquidators or administrators of the tenant who may demand the return of the deposit monies. This charge must be registered with Companies House within 21 days ofthe date of the rent deposit deed.

Landlordsshould also insist on the deed containing an indemnity clause. Such clauses usually state that the tenant is to compensate the landlord for any costs or lossesincurred as a result of the tenant’s breach of the deed. This indemnity provides protection for landlords, if a tenant company goes into administrationand an administrator attempts to “disclaim” the lease, the tenant will remain liable for the payment of rent under the indemnity.

Landlords must always ensure that the rent deposit deed has been carefully drafted to effectively protect their interests. A prospective tenant may have issues entering into a rent deposit deed which protects the interests of landlords,but in such situations landlords should exploit their stronger negotiating position.The rent deposit deed is only a specific commercial property and if the tenant does not wish to agree to these terms which are favourable for the landlord, another ready and willing tenant can always be found.

Assignment of the lease by an administrator

If the tenant company goes into administration the tenant will receive the protection of a moratorium period protecting them against any action taken against that insolvent company. During this moratorium period a landlord would be unable to use their right to forfeit the lease.

If the tenant goes into administration then an administrator would be appointed to manage and dispose of the tenant company’s assets. This could involve theadministrator seeking to assign the lease to another third party and in orderto do this the administrator would seek the landlord’s consent for the assignment. In these circumstances of an insolvent outgoing tenant, a landlordshould insist on the incoming tenant providing details of parties who can actas guarantor. This is because as previously mentioned the guarantor for the outgoingtenant is released from all liability on assignment.

Considering the current economic climate it is essential that landlords are protected against tenants falling into insolvency and being unable to pay the rent. 

BIS

Have a look at some publications from the BIS website. It's great that the government subsidies these  publications which means that there are no costs involved in ordering. Unfortunately the number of publications available in hard copy is reducing, which is inevitable during a period of government departmental cuts. 

LPC - Interviewing Assessment.

He's got game.

Completed my final LPC interviewing assessment today. An actor was hired by the LPC provider as the Client (interviewee) and I was the interviewer. Looking forward to the DVD.

I got a mark for wearing a suit. Nice! My scenario was regarding a partner in a partnership requiring legal advice on a possible departure form the parntership.

Here is one I prepared for in advance:

QUESTIONS (to ask Client)

Who is in the Pship?

History of the Pship?

PAgreement?

Why do they want to leave?

Client’s financial situation?

Financial position of Partnership?

Financial position of Ps?

Relationship with other Ps

Future plans of client?

Your concerns?

Your views? 

THE LAW

No Pship agreement =

Terms of the PA1890 take precedence and Pship should be run according to the PA1890

Pship agreement =

Provisions of the PAgreement can displace/ vary PA1890… PAgreement has precedence.

- Non written PAgreement

1. Everything shared equally, entitlement to capital / profits.

2. Work input – all work full time

3. No fixed duration of Pship = Pship at will.

OPTIONS

1. Retire from Pship (as it is a Pship at will)

P can retire and leave the Pship --> giving notice to the other Ps.

· Remaining Ps can agree to purchase outgoing P’s share, Pship remains (partial dissolution)

(terms would need to be negotiated between the parties).

OR

· If they don’t a Pship fully dissolved. Assets of Pship sold, and P would be entitled to their share of the capital in the pship.

Positives

+ Should realise value of the share.

+ Can force a sale of the outgoing P’s share.

Negatives

- May not get full value of the assets of the pship on sale of Pshp assets.

- Pship may be profitable in future, missing out on share of profits

-Do they really want to end the Pship?

- Ps may not be able to afford to purchase the share.

- May get a greater value for the share when the Pship is doing better in the future.

2. Indemnification against the existing debts of the firm from existing Ps.

Partners liable for debts of Pship incurred whilst they were Ps.

Partners jointly & severably liable for debts of firm

Indemnification prevents this. Creditors can still sue the ex- P but the Ps who entered into the agreement would pay.

Positives

+not liable for Pships debts and liabilities incurred whilst client was a P

Negatives

-existing Ps may not agree to this.

- existing Ps may not have money to do so

3. New Partnership Agreement

New agreement amending how it is run.

…every decision requires unanimous agreement.

Positives

+ Pship may be profitable in future, entitlement to the profits & share of capital would increase

Negatives

More debts could be incurred, which client would be liable for.

Profitability and value of assets may decrease so clients share may decrease. 

4. Do nothing.

Positives

Could turn the business around.

FOLLOW UP TASKS

1. Client Care Letter

2. Draft a Pship Agreement

3. Value the clients share in the Pship, need to look at the accounts.

4. Arrange for the retirement of the P

5. Draft indemnification agreement for P

COSTS and TIME FRAME

New PAgreement – 2 Hours – £300 + VAT – All Ps need to agree to it. Conflict of interest issue.

Value of Client’s share in Pship – 1 Hour –£150+ VAT

Arrange notice for P to retire and leave the Pship – 1 Hour – £150 + VAT

Indemnity Arrangement – 1 Hour – £150 + VAT – Ps need to agree to this.

Manage Sale of Pship Assets – if remaining Ps don’t purchase outgoing Ps share.

4 Hours - £600 + VAT

18/2/2011

Bought 6448 Centamin at £1.21

Centamin is currently the biggest mover on the stock exchange.

21/02/2011 - 9.59am

Holding my position. Price: £1.2890 - £420 potential profit.

The reported miner strike at their Egyptian Gold Mine was over exaggerated. The market reacted with a 13% drop in share price from £1.40 to £1.20. Further news of what happened revealed the situation was not as serious as thought.

Centamin have confirmed the situation has not impacted their Gold Mining operations in the slightest.

Will wait until the price recovers and close my position.

Egypt, the land of the Pharaohs and Centamin Egypt Limited

Centamin's Mining Fleet (Source: Centamin.com)

Mulling over the political uncertainties of Egypt's situation I decided to invest in Centamin Egypt Limited.

Centamin claim they are not exposed to the current political crisis, but as the markets are run by confidence it now means Centamin is relatively undervalued.

10/2/11 - Bought 5698 Shares at 130p

10/2/11- 5pm - Share price has risen to 140p --> Currently making £506.02

All in a days work. I await Hosni Mubarak's speech tonight, hopefully he will resign immediately instating current Vice President Omar Suleiman, allowing for a more stable Egpyt.

Centamin Egypt Limited is a mineral exploration development and mining company dual listed on the Main Market of the London Stock Exchange (LSE:CEY) and the Toronto Stock Exchange (TSX:CEE).

___________________________________________________________________

Update :

Mubarak has now left, Centamin has responded positively. Closing the position.

11/02/11 - Sold 5698 at £1.49

Total profit inclusive of Stamp Duty = £990 / 13% return on investment, over 2 days.

Hopefully Egypt will get social reforms and leadership that they need, as they did under Former President Anwar El Sadat.

Unfair Dismissal Checklist

UNFAIR DISMISSAL

• Under s94 Employment Right Act 1996, [Employees name] has a right not be be unfairly dismissed

• For an unfair dismissal claim, [Employees name] must be a qualifying employee i.e have one years continuous employment – which he [is/isn’t]

• Here the dismissal is:….

Actual dismissal (dismissal by the employer with or without notice)

Constructive (the employer has committed a repudiatory breach of an express or implied term of the contract)

• Was the 3 step procedure for dismissal complied with?Yes?

• Was there a potentially fair reason for the dismissal?Yes?

The most likely one in this case being:

[pick one]

(a) The capability or qualifications of the employee for doing work of the kind he was employed to do (this could include incompetence, or inability to do the job by reason of illness or injury);

(did the e’or warn the e’ee and give him a chance to improve?

-Did he provide adequate training?

-Could he have been moved to a job within the e’ee’s competence?

-Illness, did the e’or consult e’ee about duration and nature of illness?

(b) the conduct of the employee (this must generally relate to conduct within the employment – outside behaviour will only be relevant if it has a direct bearing on the employee’s fitness to do the job);

-thorough investigation

-employee should hava a chance to state his case

-only if misconduct is gross or persistent

-ACAS Guidelines consulted?

(c) the employee was redundant (in this case the employee will be entitled to a redundancy payment (see below));

(d) the employee could not continue to work in the position held without contravening some statutory enactment (eg where a lorry driver loses his driving licence);

(e) some other substantial reason justifying the dismissal of an employee holding the position which the employee held (it is not possible to give a comprehensive list of such reasons, but this category has been held to include dismissal where the employee refuses to accept a reorganization affecting his working hours and a dismissal arising out of a personality clash between employees); and

(f) retirement – if it takes place at or after 65 (or a lower age which is objectively justified by the employer) and it meets procedural requirements, such as complying with a duty to inform the employee of the intended retirement date and of the employee’s right to request to work beyond that date.

• S98(4) ERA 1996, the tribunal must decide..did the employer act reasonably?

Was dismissal a reasonable response?

Warn, redeploy, chance to improve, train

Misconduct discovered after dismissal, e’or cant rely on it but it may reduce compensation available

Remedies:

Basic award: -

Above 41– multiply by 1½

22 -40 – multiply by 1

below 22 – multiply by ½

Falls into what category?

No. of years he’s ½ , 1 or 1 ½

been in that category x x 310 (statutory minimum)

Compensatory award

Calculated in light of

immediate loss of net wages from the date of the dismissal to the date of the hearing, assuming the employee has not at that date got another job;

future loss of net wages – based on an estimate as to how long it might take the employee to get another job (assuming he has not yet done so);

loss of fringe benefits; and

loss of statutory protection. In any new job, the employee will have to start building up as against a future employer his statutory rights to a redundancy payment and unfair dismissal protection and a statutory minimum notice.

If the grievance, disciplinary or dismissal procedures haven’t completed and its e’ors fault?

• e’ee can get uplift of 10 – 50% on compensation

• But if non compliance is due to e’ee, - 10-50% decrease in compensation

Max is 60,600

WRONGFUL DISMISSAL

Is a common law claim based ib the employer terminatig the contract iun a way which is in breach of the contract of employment

What type of contract is it?

Indefinite – terminated with no or inadequate notice

Fixed term without break clause – termination before the contract expires

Has notice been given properly?

Notice period, if tye notice period is shorter than the one in ERA 1996 s86 the longer one prevails unless agreed otherwise

Stat minimum

1 months continuous employment - 1 weeks notice

2 years continuous employment - 2 weeks notice

up to 12

Remedies

Damages for breach of contract (out party back to position they would be in had contract not been broken)

REDUNDANCY

• Must be qualified employee (2 years continuous employment)

• Refer to employment tribunal within a 6 month period from reduncancy

• Prove that he’s been dismissed actually or constructively

• It becomes presumed that the e’ee was dismissed for redundancy

Is the reason within one of these 3? i.e within s139 ERA 1996…

(a) complete closedown (the fact that the employer has ceased or intends to cease to carry on the business for the purposes of which the employee was employed by him);

(b) partial closedown (the fact that the employer has ceased or intends to cease to carry on that business in the place where the employee was so employed); and

(c) overmanning or a change in the type of work undertaken (the fact that the requirements of the business for employees to carry out work of a particular kind, or for employees to carry out work of a particular kind in the place

where the employee was employed by the employer, have ceased or diminished, or are expected to cease or diminish).

Employee entitled to a redundancy payment but may lose it if he’s nreasonably rejected an offer for suitale alternative emplyoyment

Happy New Year and Blog Statistics

We all love statistics, well I do. So here is some self-indulgence.

Our Law in Action's page views for the month of December 2010:

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I look forward to posting on a broader range of legal issues as well as some discussions on trading in 2011-2012.