Top 12 Tips For A Landlord Dealing With A Tenant In Administration

So your tenant is going into administration - what next?

This latest blog sets out a number steps for a landlord to bear in mind if a tenant has gone into administration:-

1. All enforcement steps against a tenant for lease breaches are frozen and if you started but have not completed any they too are unable to proceed. You have the right to go to court and get leave to continue proceedings (if having asked the administrators who refuse consent) but for the purposes of this note, these are rare occasions and most landlords will be unable to pursue such claims.
2. Timing is important in rent arrear situations. You will have seen in the press that immediately after the quarter day – which is still the traditional date for payment of rent under commercial leases – tenants have a habit of going into administration. That is one of the oddities of the way the law has evolved. The reasoning is this; all debts of the failed company are dealt with in the administration (pennies in the pound after 12 or 18 months so effectively lost). The rent became payable on the quarter day, therefore, on the quarter day all of the quarter's money was due to the landlord and all of it is caught in the administration.
3. However, the other side of that particular coin is that the administrator is entitled to use the assets of the company for the purposes of the administration and that includes rented property.
4. So the current law is that if the administrator was appointed one day after the quarter day, he does not have to pay the quarter's rent but he can stay in possession (more likely allow another party into possession) without making any payment to the landlord.
5. Fair? A lot of landlords do not think so and indeed, in the Game administration the parties have persuaded the High Court to send this exact point to the Court of Appeal in the hope that the law can be changed.
6. The problem with court decisions is that they are all black and white, either all of the debt that fell due on the quarter day is due or none of it. Maybe the Court of Appeal will come up with a sensible compromise, but I would not bet on it.
7. On the same analysis, however, once the next quarter day comes along the administrator, if he stays in occupation, has to pay the quarter's rent to the landlord. Again, more likely, the buyer of the company's assets who has been allowed into occupation by the administrator will have to pay that rent. This payment should be made via the administrator so there is no argument that the landlord has accepted the buyer as a new tenant.
8. The administrator will have entered into a licence agreement with the buyer allowing the buyer to use the premises as part of the sales package. There may be a number of reasons why the buyer wants that access. At a basic level, it might be just to have the ability to strip out any tenant belongings that he has bought; one step up he might want to do a fire sale of the assets from the site and then come out. Quite often with an industrial company going under the buyer will want to access warehouses to remove stock to their own facilities. There is nothing much that a landlord can do in these scenarios other than watch like a hawk for continued occupation beyond the next rent date.
9. One silver lining for the landlord is that the occupation, by the administrator or person on his behalf like the buyer, only has to be of part of the building and that means he pays the rent for the whole building if he is still in there on the next rent day.
   
   So even if he is only utilising a small percentage of a warehouse or a shop, he has to pay all the next rent.So you can see that going in just after a quarter gives the administrator and his buyer not just a financial incentive – free occupation – but also plenty of time to decide what to do with the unit. In a large scale retail failure, there might be quite a lot of property to deal with.
10. During this period, the buyer is likely to make a commercial decision on the various units he has taken over. I tend to think of them as gold, silver and bronze. "Gold" are good locations and the buyer is going to want to take an assignment of the lease. "Silver" are worth having, but the buyer will want to negotiate with the landlord to try and improve the lease terms, maybe with rent freeze, maybe with rent reductions. "Bronze" are dogs and as soon as they have had a short time to empty out will want to give the keys back to the landlord as soon as possible. As we will see next week, the landlord should never take the keys if offered without careful thought and good advice.
11. Although in the short term this seems harsh on the landlord, particularly if he has his own money pressures from a funder who has security on the unit, the argument is that it allows an orderly transmission from the failed company to the new occupier whoever that may be.
    
    What the landlord has to remember is that although he has been put on the sidelines during this early period, if commercially it makes sense for him, ultimately the provisions of the lease will revive. The administrator can only assign the lease to the buyer under the terms of the lease and most leases will have a licence requirement and depending upon how the lease is drawn, the landlord can refuse or refuse on terms. In particular, the landlord can insist that upon an assignment all arrears are paid. In a gold location as referred to above, the buyer is going to be keen to stay and is likely with some reluctance to pay up the arrears. In the other scenarios, that might not be on offer.
12. The ultimate sanction if the parties cannot agree on a new future is that the buyer vacates and the property is left empty. As you will see next time, there are some nice tactical steps for the landlord to consider. Ultimately if it has not got a gold site with a likely early alternative occupier (remember void periods, new tenant requirements for rent concessions, rent frees and fit out periods, etc. can all mount up) it may have to swallow worse terms than it had before the failure.Some administrators attempt to play a 'fair' hand and will consider a request for an ad hoc payment reflecting the actual period of occupation if it is a lesser period than the quarter.

Next time around in this series of blogs, I will look at what the landlord should be doing to minimise his problems, both before and after administration occurs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.