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Gordon Brown Law Firm on rent and insolvency

In these challenging times, commercial landlords are more anxious than ever to ensure that rent is paid on time. James Godden from Gordon Brown Law Firm offers some advice on what to do about unpaid rent if insolvency occurs.

Despite the complexity of some leases, solutions available to landlords (in respect of a defaulting tenant) are usually clear. A landlord/tenant relationship is a simple matter of contract. If the tenant doesn’t pay on time the landlord can pursue a debt action against the tenant or forfeit the lease.

However, what’s the position if a company that is leasing property becomes insolvent? Often, the first indication that a landlord will receive of its tenant’s difficulties will be a formal notice served by the insolvency practioners.

Consequences of insolvency can take many forms, most commonly administration; this is a process by which a company may be reorganised or its assets realised.

In order to reorganise or realise a company’s assets a “statutory moratorium” comes into effect immediately upon an administration order being made. The main effect of this is that no legal process may be started or continued except with the consent of the administrator or with the permission of the court.

While the administrators will have been appointed on the basis that they incur no personal liability for the company’s debts, it’s likely they will agree to pay the rent for as long as the business continues to use the premises.

However, if the premises are not viable, the administrators will simply cease trading and ask if the landlord will accept a surrender of the lease. Arrears may accrue once more making it necessary to consider whether rent recovery can be achieved by other means.

Leasehold documentation should be analysed to establish whether the arrears can be enforced against any former tenants or guarantors. If they can, the landlord must first serve a “Section 17 Notice” pursuant to the Landlord and Tenant (Covenants) Act 1995 within six months of the arrears falling due.

Alternatively, the landlord may be able to defray the debt due to it by withdrawing money from a rent deposit or by recovering the rent due under an underlease directly from the undertenant.

Given the complexity of the law in this area and the consequences for a landlord who pursues the wrong option, specialist legal advice should be obtained at the earliest opportunity.

This was posted in Bdaily's Members' News section by Gordon Brown Associates .