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.
