Continuing economic pressure has left many commercial tenants, particularly in the retail and hospitality sectors, vulnerable to financial distress. For landlords, tenant insolvency may result not only in rent arrears but also in restricted enforcement rights, uncertainty over possession and a reduction in the investment value of the premises. Early identification of the risks and a clear understanding of the relevant insolvency procedure are therefore essential.
Recognising the Warning Signs
Financial difficulties will often become apparent before a tenant formally enters insolvency. Warning signs may include persistently late or partial rent payments, repeated requests for rent concessions, reduced trading hours, falling stock levels, staff reductions and unexplained closure of all or part of the premises.
An urgent request to assign or sublet the premises, surrender the lease or substantially vary the rent may also indicate financial pressure. Landlords should monitor publicly available information, including delayed company accounts, changes of directors or auditors, unsatisfied judgments, winding-up petitions and the registration of new security.
Where concerns arise, the landlord should promptly review the lease, rent deposit deed, guarantees, licences to assign and any authorised guarantee agreement (“AGA”). It must also avoid inadvertently waiving an existing right to forfeit. In particular, demanding or accepting rent with knowledge of a breach may affirm the continuation of the lease and waive the right to forfeit for that breach.
Recovering Rent Before and During Insolvency
Before formal insolvency, a landlord may be able to issue debt proceedings, exercise Commercial Rent Arrears Recovery (“CRAR”), draw down a rent deposit or forfeit the lease. CRAR is subject to statutory requirements and applies principally to rent recoverable from purely commercial premises. A winding-up petition may also be available where an undisputed debt is due, although insolvency proceedings should not be used as a debt-recovery tactic where the debt is genuinely disputed on substantial grounds.
The position changes once a formal insolvency procedure begins. Where the tenant enters administration, paragraph 43 of Schedule B1 to the Insolvency Act 1986 imposes a statutory moratorium. The landlord cannot exercise forfeiture by peaceable re-entry or commence or continue most enforcement action without the administrator’s consent or the court’s permission.
The treatment of rent during administration depends upon the use made of the premises. In Jervis v Pillar Denton Ltd (Game Station) [2014] EWCA Civ 180, the Court of Appeal established a “pay as you go” approach. Where administrators retain the premises for the benefit of the administration, rent accruing during the period of beneficial occupation will ordinarily be payable as an administration expense, calculated on a daily basis. Pre-administration arrears will generally rank as an unsecured claim.
Rent Reductions and Restructuring Plans
A company voluntary arrangement (“CVA”) or restructuring plan may compromise historic arrears, reduce future rent or facilitate the closure of unprofitable premises. Under Part 26A of the Companies Act 2006, the court may sanction a restructuring plan capable of binding dissenting creditors through “cross-class cram down”. A landlord may therefore be bound by rent reductions even where it voted against the proposal, provided the statutory conditions are satisfied and the court sanctions the plan.
The importance of third-party security was demonstrated in Ocean fill Ltd v Nuffield Health Wellbeing Ltd and Cannons Group Ltd [2022] EWHC 2178 (Ch). Virgin Active, the current tenant, became subject to a restructuring plan which compromised its liabilities under the lease. The landlord subsequently pursued the former tenant under an AGA and the former guarantor under a sub-guarantee.
The High Court held that the restructuring plan compromised Virgin Active’s liability by operation of law but did not rewrite the lease or discharge the independent obligations owed by the former tenant and guarantor. Those parties therefore remained liable to the landlord. The decision demonstrates that a compromise of the current tenant’s liability does not necessarily release guarantors or former tenants, although the outcome will depend upon the wording of the relevant lease, guarantee, AGA and restructuring plan.
Recovering Possession: Forfeiture and Disclaimer
Most commercial leases permit forfeiture where rent remains unpaid or the tenant enters a specified insolvency procedure. Before any statutory moratorium takes effect, the landlord may be able to forfeit through court proceedings or peaceable re-entry. For breaches other than non-payment of rent, a notice under section 146 of the Law of Property Act 1925 will ordinarily be required.
The landlord must carefully consider whether forfeiture is commercially desirable. Recovering possession may end the rental liability of guarantors and former tenants for future sums, leave the landlord responsible for business rates, security and repairs, and place any occupational subleases at risk. Relief from forfeiture may also be available to the tenant and, in appropriate circumstances, to subtenants or mortgagees.
If the tenant enters administration, forfeiture requires the administrator’s consent or the court’s permission. The court will balance the landlord’s proprietary interests against the statutory purpose of the administration. Insolvency does not, therefore, automatically entitle the landlord to immediate possession.
In liquidation, a liquidator may disclaim an onerous lease under section 178 of the Insolvency Act 1986. Disclaimer terminates the insolvent tenant’s rights and liabilities under the lease from the date of disclaimer. However, it does not automatically extinguish the independent rights or liabilities of guarantors, former tenants, subtenants or mortgagees. Where third-party interests remain, possession or vesting-order proceedings may be necessary.
Guarantees, Rent Deposits and Subtenants
Guarantees, AGAs and rent deposits may provide the landlord with its most effective recovery options. Where payment is sought from a former tenant or guarantor in respect of a fixed charge, section 17 of the Landlord and Tenant (Covenants) Act 1995 generally requires notice to be served within six months of the sum becoming due. Failure to comply may prevent recovery.
The landlord’s ability to use a rent deposit will depend upon the terms of the deposit deed and the legal basis on which the money is held. The effect of insolvency must therefore be considered before any withdrawal is made. A financially viable subtenant may also offer a continuing income stream or an opportunity to negotiate a direct tenancy, but care is required to avoid unintentionally creating a landlord-and-tenant relationship.
Conclusion
Commercial tenant insolvency requires early and strategically informed action. Landlords should monitor warning signs, preserve their contractual rights and assess the commercial consequences of enforcement before selecting a remedy. The appropriate response will depend upon the insolvency procedure, the wording of the lease and the availability of guarantees, AGAs, rent deposits and subtenants.
At Privity Legal, we offer tailor-made advice to commercial landlords and property investors facing tenant arrears, restructuring or insolvency. We can review the relevant lease and security documents, advise on rent recovery and possession options, and develop a commercially focused strategy suited to the particular property, tenant and insolvency process.
*This article provides general information on the law of England and Wales and does not constitute legal advice. Specific advice should be obtained in relation to individual circumstances.
OTHER ARTICLES (Civil and Housing)
CIVIL/DEBT RECOVERIES
HOUSING /L&T
Eviction by Economics: Rent Arrears and the Moral Crisis of Modern Housing –
