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Friday, 18 February 2011

What Happens If Your Landlord Goes Bust?



The recession hasn't just hit tenants - landlords of commercial property may also be at risk of insolvency. 

If you're a commercial tenant, what should you look out for if your landlord goes bust?

You might be lucky, and it has little effect on you, or it might set in train a sequence of events over which you have little or no control.

Here's a brief outline of some of the things to think about and discuss with your advisors.

Will you be told?

You're likely to receive a letter from the insolvency practitioner (IP) dealing with your landlord’s insolvency telling you about the insolvency and directing you to carry on paying your rent, service charge, insurance contributions etc, but from now on to a different bank account. 

If the IP doesn’t give you enough information or if you have any questions, you should get in touch with the IP straight away.

What should you do?

Carry on complying with your obligations under your lease as before. 

If you don’t, then the IP still has the benefit of your landlord’s rights to end your lease (forfeiture) for breach of covenant.

Make sure your landlord’s obligations in the lease are complied with, for example any obligations to light and maintain common parts.

Make sure the IP has details of any side letters or other supplemental agreements recording concessions or special agreements you have reached with your landlord and which are not dealt with in the lease. 

For example you may have negotiated a personal deal with your landlord to pay your rent monthly, rather than quarterly. The IP needs to know this in order to understand how you pay your rent. 

Your landlord’s filing of deeds etc might be in a mess, so be as helpful as you can to the IP where it's in your interests to do so, for example by providing copies of any missing letters or deeds.

The IP may be looking to sell the property, so check what your lease says about you having to allow your landlord to show people around and whether your landlord is allowed to put up a “for sale” sign. 

If signs are allowed, check if you enjoy the benefit of any conditions in the lease that say your own signage must not be obscured by sales boards (particularly important if you're in retail). 

Make sure the IP complies with any obligations to give prior notice before showing people around and sticks to any hours restrictions on when they can do so.

Is your rent deposit at risk?

If you paid a rent deposit, how safe it is will depend on how well it was set up and documented in the first place.

If the money was simply paid to your landlord then there's a danger it will be swept up with any other money held by your landlord and be subject to the claims of your landlord’s creditors.

In order to avoid this, when a rent deposit is initially set up, ensure it's paid into a separate account from your landlord’s other monies so it's easily identifiable in future.

You should also enter into a rent deposit deed with your landlord when the deposit is paid. 

The deed should spell out the circumstances in which your landlord would be entitled to draw on the deposit money and should also say that the deposit money is either held on trust by your landlord or that the money belongs to you but is charged to your landlord. 

This will help stop your landlord’s creditors being able to claim the money for themselves.

What about service charges and sinking funds?

These payments are potentially more at risk. 

It depends how well your lease was negotiated and drafted. 

You're just another unsecured creditor, unless the money is being held on trust. 

The RICS Service Charge Code of Practice recommends that sinking funds are held in trust for occupiers and separate from the landlord’s own monies.

What if it all grinds to a halt – can you/should you step in and do what your landlord should be doing?

Check with the IP that the property is still insured. 

If it isn’t, you may need to consider insuring the property yourself. 

This could prove problematic though as you need to avoid any double insurance and you might not be able to recover the cost of insuring from anyone else (eg other tenants).

Where your lease is only of part of the property, if the common parts are not being maintained properly, you might want to consider doing it yourself or together with the other tenants, but you need to be careful you don't breach any of your lease obligations. 

You would need to get the IP’s permission to do this and you're unlikely to be able to recover the costs from anyone else. In these circumstances, try to open a dialogue between you, the other tenants and the IP.

You may be able to claim damages if you suffer loss, or be able to set off rental payments, but you should take specialist advice before contemplating these actions, as much will depend on what type of insolvency applies to your landlord.

The IP might be an administrator or a receiver, or ultimately a liquidator or (if the landlord is an individual) a trustee in bankruptcy. 

Alternatively the landlord might be entering into some form of voluntary arrangement with its creditors. 

A discussion of the different types of insolvency practitioner is outside the scope of this post.

Will your lease survive?

It's very unlikely that your lease will contain any provisions allowing it to be terminated if your landlord becomes insolvent.

Assuming the property has value and a good income stream (your rent), the IP’s aim will usually be either to carry on your landlord’s business in some way, or to sell the property with the benefit of your lease. 

In those circumstances the IP will want to maintain a good relationship with you and any other tenants. If all goes well, it should have little effect on you.

On the other hand, if the property is not economically viable, and is effectively a liability rather than an asset, then if your landlord is bankrupt or in liquidation, there's a danger your landlord’s interest might be disclaimed. 

This is where things can get complicated and where your continued occupation of the property may be in jeopardy.

If there's a risk of that happening you need to take specialist legal advice. A full discussion of disclaimer would take too long in a post like this, but briefly, the possibilities are:-

·         If your landlord owns the freehold, and it's disclaimed, it reverts to the Crown and the Crown does not accept lease obligations if this happens (see this post on the practice known as escheat).
·         If your landlord’s interest is leasehold and the IP disclaims your landlord’s lease, your own lease would also fall away. Then you might be able to apply to the court for a vesting order vesting the landlord’s lease in you (the rules are quite complex). But, the new lease would be on the same terms as the landlord’s old lease, not your old lease, which may not be what you want if you only had a lease of part of your landlord’s property.

There may be other difficulties if your lease is a sub-lease. 

If your landlord’s lease (the head-lease) allows its landlord (the superior landlord) to end (forfeit) the head-lease when your landlord becomes insolvent, then forfeiture of the head-lease would also bring your lease to an end. 

However, all is not necessarily lost as you might be able to obtain relief from forfeiture from the court (another fairly complex process).

Another possibility, where you're a sub-tenant and your landlord is in arrears under the head-lease, is the superior landlord might serve notice on you requiring you to pay your rent direct to the superior landlord until those arrears are covered. 

Again, seek advice and check the validity of the notice. It’s a cheap and quick way for the superior landlord to maintain some income, but it creates a new landlord and tenant relationship between the superior landlord and you.

What if your landlord goes bust whilst you are renewing your lease?

It can be very awkward if your landlord is opposing your lease renewal and then goes into administration.

You cannot take the lease renewal to court without either getting the consent of the IP (in this case the administrator) or permission from the court. 

In deciding what to do, the court has to strike a balance between the rights of the IP to conduct an administration in accordance with its objectives, and your right to have your application heard and to be granted a new lease. 

There's been some recent case law on this, but clearly it's something on which you would need to take specialist advice.

As you can see, your landlord going bust can lead to a number of different outcomes depending on the circumstances. 

It's wise therefore to be aware of the possible implications of your landlord’s insolvency and to take legal advice at an early stage.

UPDATE MARCH 2012

For more about the impact of landlord insolvency on subtenants, see my post Subtenants - What Happens If Your Landlord Goes Bust? 

UPDATE 19/2/2013 - The above post is now two years old, but still seems to be a popular one on this blog - a continuing and troubling sign of the times. If I come across any more recent examples of what can happen when a landlord goes bust, I'll do a follow-up post. if anyone else meanwhile has any examples, I'd be delighted to hear from them.

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