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Landlord Insolvency: The Tables Turned- 30/03/2011
There has been much comment recently highlighting the plight of landlords whose tenants have become insolvent. However, there are indications that the number of landlord insolvencies may increase as the recession evolves and lenders resolve to take action. Whilst landlords are now fairly well versed in the options available to them when a tenant is in default, tenants would be well advised to understand how an insolvent landlord may diminish the value and viability of their own interest in the lease.
Key issues to consider where a landlord becomes insolvent:
1. Tenant's rent deposit
Careful drafting is required to ensure that the deposit remains separate from assets forming part of the landlord's estate, either by being held on trust, or stated to remain property of the tenant and charged to the landlord.
2. Impact on lease renewals and rent reviews
Relatively little. Administrators and liquidators are allowed to settle rent reviews and enter into lease renewals under the Landlord and Tenant Act 1954. The Court has also held that renewal proceedings should be permitted to continue without delay if the majority of creditors will benefit or be unaffected.
3. Landlord's breach of contract
An insolvent landlord may fail to comply with obligations under the lease but it will often be futile for the tenant to issue proceedings in respect of the breach. Instead a tenant should evaluate whether self-help remedies are available and whether it is possible to offset the cost of self-help against outgoings under the lease. A tenant should also consider whether taking such action would breach the lease or leave them exposed to other liabilities (e.g. trespass).
Alternatively, a tenant could look to claim damages from a previous landlord where the insolvent landlord purchased a reversion of the tenant's interest.
Ultimately, if the failure to comply with obligations is so extensive as to amount to derogation from grant, the tenant may seek to repudiate the lease by arguing that that the breach has substantially deprived the tenant of its enjoyment of the premises.
4. Rent payments
Despite a landlord's insolvency, rent remains payable under the lease. However, a tenant will need to ascertain to whom rent should now be paid: this will usually be a liquidator, administrator or CVA supervisor. Where the tenant is a sub-tenant and has received a notice under s6 Law of Distress (Amendment Act) 1908, rent is payable to the superior landlord.
5. Superior lease issues
Where the landlord is itself a tenant under a superior lease, the superior lease may come to an end with the following consequences:
- Surrender: The sub-lease continues on the same terms but is now directed at the superior landlord. This may be good for the sub-tenant who may have fewer obligations but not for the superior landlord if the sub-lease reserved a lower rent than the superior lease.
- Forfeiture: The sub-lease falls away and the sub-tenant loses his right to occupy. A court can grant relief if the sub-tenant steps into the insolvent landlord's shoes. This will probably suit the superior landlord more than the sub-tenant, who may have to pay arrears due under the superior lease and comply with the potentially more onerous superior lease.
- Disclaimer by the liquidator: The sub-lease falls away although the sub-tenant can remain in occupation as long as the rent is paid and obligations under the superior lease are performed. This is not ideal for either party as there is no contractual relationship between them unless and until the sub-tenant applies for the superior lease to be vested in itself.
Conclusion
It is vital for tenants to be alive to the possibility of landlord insolvency. Leases should be carefully drafted to ensure the safety of the rent deposit and perhaps include a right to break in the event of landlord insolvency. Tenants should also be aware of the steps they can take to remedy breaches by an insolvent landlord and gain early leverage by negotiating directly with liquidators or administrators. Sub-tenants should be alert to discussions which may impact on the future of a superior lease and intervene at the earliest possible stage.
For a more detailed analysis of the issues to be considered on a landlord's insolvency, please read our article "Reversal of Fortune" which was first published in New Law Journal and is reproduced with their kind permission.