Tenant insolvency The effect on landlords of commercial (including licensed) premises and some commercial considerations December 2008 Contents 2. Introduction 2. Remedies normally available to a landlord 3. Types of insolvency & their effects on remedies available 6. Summary of options on tenant insolvency 7. Considerations applying specifically to licensed premises 8. Some commercial suggestions and other considerations 10. About Poppleston Allen 10. About Field Fisher Waterhouse 11. Contacts
Introduction The much publicised administrations of MFI and Woolworths were not the first signs of problems in the retail industry; many other well know high street names have gone into administration (or other form of insolvency) over the last few months, such as Stead & Simpson, Dolcis, MK One, Digital Depot, Little Chef and ILVA, causing landlords and their agents to remind themselves of exactly what Administration means. The next Quarter Day is fast approaching and will throw this problem into sharper relief. This note has been prepared to highlight issues which a landlord or landlord s managing agent would need to consider and action which may need to be taken where a tenant has become insolvent or has just failed to pay the rent or service charge which is due under the terms of the lease. The note covers the following: the remedies available to the landlord the various types of insolvency and how they could affect the remedies available to a landlord. considerations applicable specifically to licensed premises some commercial suggestions and other considerations In all cases though, it is important to ensure that you have as much information to hand as possible so that you are able to react to the particular circumstances. The first step in any insolvency situation is to confirm the exact legal position and then to consider which options are available and whether you want to pursue any of them at this stage. In going through this process, you may need to consult with any lender and inform appropriate third parties, such as insurers. Before looking at the various types of insolvency, we summarise the remedies that may be available to a landlord in normal (i.e. non insolvency) circumstances. Remedies normally available to a landlord Distraint Where a tenant is in arrears of rent, this remedy allows landlords of commercial premises to remove goods belonging to the tenant from the leased premises up to the value of the arrears there are certain exemptions, such as tools of trade. In practice, tenants will generally enter into a walking possession agreement which gives the tenant a specified number of days to pay the rent before the goods are removed. Distress should be carried out by a Certificated Bailiff. It is an antiquated, cheap (though technically very complex) and potentially effective remedy. Section 6 Law of Distress (Amendment) Act 1908 When a tenant fails to pay rent and there is a subtenant, a landlord can serve on any sub-tenant a notice ( section 6 Notice ) requiring the sub-tenant to pay directly to the landlord any rent that is due under the terms of the sub-lease to the superior landlord (instead of to its immediate landlord). This can be a highly effective (and simple) remedy. Court proceedings Where there are arrears of rent, a landlord may commence court proceedings against a tenant, and can seek summary judgment where there can be no defence to the claim. The judgment can then be enforced against any of the tenant's assets through court enforcement methods. Where a tenant is in breach of any other covenants in the lease and the landlord suffers a loss as a result, 2
the landlord can seek to recover that loss, through court proceedings, by way of a damages claim. A landlord may also apply for an injunction restraining a breach or specific performance requiring a tenant to comply with its obligations. The Court has a discretion as to whether or not to grant an injunction/specific performance. Court action can be costly and time consuming. Winding up/bankruptcy A statutory demand can be served on a defaulting tenant for undisputed sums in excess of 750. Examples include non-payment of rent. If payment of the debt is not made within 21 days, the landlord can then issue a winding up petition (in the case of a company) or a bankruptcy petition (in the case of an individual). (Having said that, the courts are resistant to the winding-up process being used simply for debt recovery purposes; winding up should be used more as a last resort.) Forfeiture Most modern leases contain forfeiture clauses. Such clauses give the landlord the right to forfeit the lease and recover possession of the premises where there are arrears of rent or breaches of any other covenants in the lease. A lease can be forfeited by the landlord re-entering the premises peaceably (in respect of commercial premises only) or by court proceedings. Where there is a breach of any covenant apart from non-payment of rent, a landlord must serve a notice, under section 146 of the Law of Property Act 1925, before taking steps to forfeit. The notice must refer to the relevant covenants, specify the breach, and state what needs to be done to remedy that breach. A reasonable time must be allowed to elapse to allow the tenant to remedy the breach of covenant (in so far as it is capable of being remedied) before the lease can be forfeited. A tenant (as well as a sub-tenant and mortgagee) can apply for relief against forfeiture. Again, court action can be costly and time consuming. Rent deposit If the landlord holds a rent deposit, to the extent that the rent deposit deed allows, the landlord can use the funds held to settle sums due under the lease (such as unpaid rents). Whilst this resolves a problem shortterm, it does not resolve the long-term issue of a tenant who cannot pay the rent. It would normally be preferable to pursue other remedies first, whilst retaining the cash in the rent deposit account. Guarantors and previous tenants If the tenant is not paying the rent, check: is there a guarantor of that tenant who is still able to pay? is there a previous tenant who is still liable under an authorised guarantee agreement provided at the time of the assignment to the current tenant? if the lease was granted before 1 January 1996 (or under an agreement for lease entered into before that date) the original tenant and any previous tenants (who provided direct covenants to the landlord in a licence to assign), as well as their guarantors, will remain liable for the rent if there are any former tenants, or their guarantors, who are liable then you must serve a section 17 notice on them within six months of the date that the sum demanded was due. (Failure to serve the notice within time will result in you not being able to claim that particular sum from them.) If this is the situation and the party served with the section 17 notices so requires (for example a guarantor), it can call upon the landlord to grant it an overriding lease, so taking back control of the property but also the liability to pay rent Subject to the wording of the relevant covenant, guarantors and previous tenants should be pursued at the same time as the current tenant, where it is clear that there is a risk of insolvency. Types of insolvency & their effects on remedies available There are various types of insolvency and they each have their own peculiarities. The first a landlord may hear of it is in the news but sometimes the likely insolvency of the tenant will be flagged earlier - in which case the landlord is given a window of opportunity which will not be open for long. Acting quickly is the key and, as noted below, there are certain actions which may be worth considering, even where there is no current threat of insolvency. The following are the forms of insolvency which are most likely to occur: 3
Administration Administrative receivership The purpose of Administration is to try to rescue the company as a going concern or to realise its property for the benefit of creditors. To this end, an Administrator enjoys a complete stay of proceedings against the company during the currency of the Administration Order to enable him to consider and obtain approval of his rescue plans or the orderly sale of assets. A landlord must therefore obtain the the court, or the consent of the Administrator, before taking the following steps: distress forfeiture (either by peaceable re-entry or by proceedings) execution or other proceedings against a tenant in administration If the Administrator is continuing to use the tenant's premises, it is generally accepted that the rent payable is to be treated as an expense of the administration and would be payable in priority to the Administrator s own remuneration; Rule 2.67 of the Insolvency Rules 1986 (as amended). The rent would, however, only be paid out on a pro rata basis (not quarterly). (Administrators will often try to say that they will cease to trade if the landlord seeks to demand rent as an expense (as they cannot afford to pay); this does not alter the fact that normally the Administrator would be liable for the rent for so long as the premises are being used for the purposes of the administration; it then boils down to a commercial negotiation or bluff and counter bluff!). If the premises do not provide any benefit to the administration then it is likely that the court would allow the landlord to enforce its remedies in practical terms though, in such situations it may well be more cost effective and quicker to negotiate a surrender with the Administrator. The following remedies are still available to a landlord ( the need for an application to the court): serving a section 6 Notice on any sub-tenant using a rent deposit, where the rent deposit is created in a way which provides the appropriate security An Administrative Receiver (note that this is not the same concept as an Administrator) can be appointed by a floating charge holder who holds security over the whole (or substantially the whole) of the assets of the company where the floating charge was created before 15 September 2003. Administrative Receivership allows for the realisation of the assets subject to the security. Following the appointment of an Administrative Receiver, the landlord may still pursue its remedies the leave of the court or the consent of the Administrative Receiver. Distress is a particularly powerful remedy as the Administrative Receiver will be keen to preserve the assets and may well wish to do a deal with the landlord. Equally, if the landlord can find a more secure covenant elsewhere, forfeiture is a useful remedy. Voluntary liquidation If the directors of a company consider that the company is unable to continue trading as a result of its indebtedness, they may call meetings of the shareholders and creditors to pass a resolution that the company be wound up (a Creditors Voluntary Liquidation). A resolution is passed by the company and a Liquidator is appointed to collect in and dispose of the company s assets for the benefit of creditors. Once the tenant has gone into Voluntary Liquidation, the landlord retains the right to pursue any of its remedies. Distraint or forfeiture can be effective options. A claim for arrears or damages may well not result in the recovery of any monies since the landlord is likely to be ranked as an ordinary creditor. The Liquidator has the power to disclaim onerous contracts, including leases. Having done so, relevant parties (such as a previous tenant) may apply for an order vesting the residue of the lease in it. The fact that the lease has been disclaimed does not prevent the landlord claiming in the liquidation for loss of future rent arising as a result there is a complex formula for calculating the loss set out in the insolvency legislation. We discuss disclaimer in further detail in the next section. 4
Compulsory liquidation Where a company is wound up by its creditors (upon a petition to the court by one or more of its creditors) or by the company itself, the company goes into Compulsory Liquidation. Following Compulsory Liquidation of the tenant, the landlord is precluded from doing the following the Court: levying distress forfeiture by court proceedings (it is also inadvisable to do so by peaceable re-entry given that there is a bar on doing so where a tenant is in Administration) court proceedings for arrears of rent or damages Compulsory liquidation is a more cumbersome and expensive process than voluntary liquidation; the official receiver is likely to be the liquidator and, as a court appointed official, is unlikely to take action, unless pushed. The following options are still available to a landlord: serving a section 6 Notice on any sub-tenant utilising a rent deposit, to the extent that the rent deposit deed allows A Liquidator may disclaim onerous contracts, which can include a lease. The effect of disclaimer is complex. However, in essence, the rights and liabilities of the tenant are brought to an end, but the rights and liabilities of others, e.g. former tenants and guarantors, continue. The landlord can serve a notice on the Liquidator requiring him to decide within 28 days whether or not the lease is to be disclaimed. Bankruptcy An individual can be the subject of a bankruptcy order, which results in their property vesting in the trustee in bankruptcy. On the bankruptcy of the tenant, the landlord may not pursue the following remedies the Court: forfeiture by court proceedings forfeiture by peaceable re-entry proceedings for arrears or damages The following remedies are still available to a landlord: levying distress, but only for six months rent that fell due before the bankruptcy order was made. The balance of any monies must be returned to the trustee in bankruptcy (section 347(1) Insolvency Act 1986) serving a section 6 Notice on any sub-tenant utilising a rent deposit, to the extent that the rent deposit deed allows Voluntary arrangements Companies or individuals may reach a compromise ( arrangement ) with their creditors, a CVA or IVA, as applicable. Once entered into, following approval at a meeting between the company and its creditors, the landlord creditor who was entitled to vote at the meeting is bound by the agreed arrangement and a Supervisor is appointed to supervise the arrangement. Once a CVA/IVA is approved (and assuming the landlord has had notice), the landlord cannot take any action or step to enforce the obligations under the lease. Its only remedies are to enforce the terms of the arrangement. If the debtor/tenant fails to comply with the terms of the arrangement then the Supervisor is normally required to wind up the company or petition for bankruptcy. Equally, there may be a moratorium against such action or steps whilst a CVA is being arranged. 5
Company Voluntary Arrangements - CVA Individual Voluntary Arrangement - IVA Subject to the possibility of a moratorium - see below - a CVA will not fetter the landlord's right to distrain but the landlord (who would have received notice of the proposal) must make sure that the final terms of the voluntary arrangement do not result in any previous tenants or guarantors being released from their liability. The section 6 Notice remedy is unaffected by a CVA. Where the tenant is entering into an IVA, the tenant will often apply to Court for an Interim Order. This provides protection whilst the voluntary arrangement is being prepared. Section 252(2)(b) Insolvency Act 1986 prohibits commencing or continuing proceedings, execution or other legal processes permission of the Court once the Interim Order has been made. Service of a section 6 Notice is not affected by an IVA. There is likely to be a moratorium in relation to a small company (essentially, this is defined as a company which satisfies two or more of the following criteria; that it has: an annual turnover of not more than 6.5 million; a balance sheet total of not more than 3.26 million; not more than 50 employees - section 382 of the Companies Act 2006) and if and for so long as this is in place then the landlord cannot distrain. Summary of options on tenant insolvency Potential Options Distraint for rent Forfeiture of lease by proceedings Forfeiture of lease by peaceable re-entry Administration Administrative Receivership Voluntary Liquidation Compulsory Liquidation Prohibited Possible Possible Prohibited Court. Prohibited Court Prohibited Court Possible Possible Prohibited Court Possible Possible Inadvisable Court CVA/IVA Prohibited if Landlord has notice of arrangement / if there is an Interim Order/ moratorium Prohibited if Landlord has notice of arrangement / if there is an Interim Order/ moratorium Prohibited if Landlord has notice of arrangement / if there is an Interim Order/ moratorium Proceedings for arrears/ damages Prohibited Court Possible Possible Prohibited Court Prohibited if Landlord has notice of arrangement / if there is an Interim Order/ moratorium Service of Section 6 Notice Possible Possible Possible Possible Possible 6
Considerations applying specifically to licensed premises Additional considerations apply if part of the tenant s business involves the sale of alcohol, the provision of regulated entertainment at any time, or the provision of hot food/drinks between the hours of 23:00 and 05:00. In these circumstances, the tenant will have acquired a premises licence 1 (for example, pubs, restaurants, hotel bars, bars in health and fitness clubs, nightclubs or late night takeaways) in order to carry out those activities, unless the tenant has delegated that responsibility to one of its managers. A premises licence lapses immediately if the holder of the licence becomes insolvent. For licensing purposes, an individual becomes insolvent on either: the approval of a voluntary arrangement proposed by him being adjudged bankrupt seven day period, the premises licence will no longer have any legal standing 3. Reinstatement of a licence following insolvency can occur in one of two ways. The first is by giving an Interim Authority Notice to the local Licensing Authority. As a freeholder or leaseholder, a landlord would be entitled to apply for such an authority, as would the tenant s Insolvency Practitioner. As long as notice has also been given to the local Chief Officer of Police within the seven day period, the licence is likely to be 4 reinstated and licensable activities may continue. Assuming that the Interim Authority Notice is not challenged, an application to transfer the premises licence must be made within two months of the Interim Authority Notice being given. This time limit is clearly considered sufficient to allow the licence to be transferred to a new permanent or interim tenant, although in practice a transfer may have to be made simply to prevent the premises licence lapsing at the end of that two month period. having his estate sequestrated entering into a deed of arrangement made for the benefit of his creditors or a trust deed for his creditors A company becomes insolvent on: the approval of a voluntary arrangement proposed by its creditors the appointment of an administrator in respect of the company the appointment of an administrative receiver in respect of the company going 2 into liquidation If, as landlord, you want the licence to survive, it is essential that ( reinstatement ) action is taken within a maximum of seven days of the date of any of the above occurring. If such action is not taken within the 1 The tenant would normally want to control the premises licence holding it in its name; its manager would be the designated premises supervisor. 2 This is the wording taken from section 27 of the Licensing Act 2003; applying section 129 of the Insolvency Act 1986, this would mean: for voluntary winding up, the passing of the company resolution; for court ordered winding up, the time the court makes the order and for any other winding up, the time of the presentation of the petition to the court for winding up. 3 Sometimes it is very difficult to know that insolvency has occurred until much later (in which case it would be too late), so the tenant s financial position should be closely monitored, if this is a likelihood. Unfortunately, some Licensing Authorities use the Companies House website to check whether the company is insolvent. This information is rarely up to date and can result in the transfer, after that 7 day period, of a premises licence which has in fact lapsed due to the insolvency of the existing premises licence holder, but whom neither the landlord nor the Licensing Authority was aware was insolvent at the time of the transfer. Such a premises licence would have lapsed immediately upon insolvency and no matter how many subsequent transfers are made, they would in effect be invalid the licence is dead. 4 The Police can object within 48 hours of being notified of an Interim Authority Notice, but only in exceptional circumstances. 7
The other way to reinstate a lapsed premises licence is by making an application to transfer the premises licence to the landlord, or to a person to whom the landlord wishes the licence transferred in the short term. Again, the Transfer Application must be made within seven days of the licence lapsing. Where the tenant is insolvent, no consent is required from the tenant to the transfer. Again, the Police must be served with the application, and have 14 days to object. During those 14 days, the premises can continue to operate even if, at a subsequent hearing, the Licensing Authority refuses to grant the transfer. Some companies specialise in managing licensed premises during these interim periods, and generally the police do not object to a transfer to these companies so long as this raises no issues from a crime and disorder perspective. In both the case of an Interim Authority Notice, and a Transfer, the premises licence has lapsed, and no licensable activities can take place between the original date of insolvency and the date that either application is made to the Licensing Authority and/or the Police. The above is a brief summary of the effect of insolvency on licensed premises, and what you can do, as landlord, if you want to keep the premises licence alive. The most important thing to remember is that there are only seven days in which to act, and that this period starts at the date of insolvency. Clarification of that date is therefore essential. If the tenant is insolvent and is holding a premises licence, specialist advice should always be sought promptly, as there are numerous other requirements under Licensing Law for holders of premises licences, either temporarily or in the longer term. Some commercial suggestions and other considerations Before taking an particular course of action, where you think your tenant may be insolvent, you should always check with Companies House to see if any insolvency notices have been served. Which remedies to pursue? Some of the remedies can be pursued concurrently, but not all of them, and some can have an immediate impact, so both the legal and commercial issues should be considered; for instance, forfeiture of the lease can result in the landlord taking the property back under its control and, at the same time, assuming the rating liability. The liability for rates If the lease has been forfeited, surrendered, disclaimed or otherwise terminated, the landlord will be liable for business rates, the benefit of empty rates relief after the initial three months of the void (six months for industrial properties). The potential to become liable for rates is clearly a consideration but the following may help: if the property is a listed building then no rates are payable if the property is vacant. (The same applies if the property is empty and the rate payer is in administration or liquidation.) no rates are payable if occupation of the property is prohibited by law for instance, due to lack of adequate means of escape consider putting in a charity shop under a short term licence or some other occupier, whether at nil rent or at a concessionary rent, making sure they pick up the liability. (Ensuring that the property is occupied, even at no rent, can also help with the buildings insurance - see below.) if the tenant is one of several, perhaps one of the adjacent tenants would be keen to use the space for a short time, or better still take over the lease? Effect on buildings insurance Check the status of the insurance cover and policy. Insurance cover would have been provided on the understanding that the property is occupied; if the tenant ceases to occupy then the insurers must be 8
informed; failure to do this may well invalidate or compromise the insurance. There is likely to be an additional premium if the property is vacant and the insurers will almost invariably reduce the insured risks (normally only providing cover for fire, lightening, explosion and aircraft) and impose requirements - such as 24 hour security. Inform lenders Any lenders should be informed of any issues in line with the terms of the loan documents, so as to avoid any point being taken by the lenders that the landlord/ borrower is in breach of its banking covenants - at least in relation to these specific areas. Rent Reductions and other concessions Stopping short of insolvency, many tenants are approaching their landlords in the light of the difficult trading conditions and asking for concessions, such as paying rent and service charges monthly (as opposed to quarterly), rent reductions and rent free periods. How these are treated will depend upon the individual circumstances, but landlords will need to consider any application on its merits. If a landlord is willing to accept a rent concession, it should consider, for instance, whether or not, in return, it asks for a share in the turnover from the premises if the tenant is able to trade out of the recession, with the premises becoming profitable once again. In considering any such arrangements also consider making sure that: they have no adverse impact on rent review any lender is informed and approval obtained where there is a superior lease, make sure that any concession is not in breach of that superior lease they do not prejudice any claim which may be available against guarantors and previous tenants if there is a default under the revised terms, the landlord is able to go back to the previous position and recover any shortfall arising as a result - this last point might be nothing more than an empty gesture in the circumstances they are limited in time - rather than permanent any agreement is properly documented, to avoid future dispute These suggestions will all have to be considered in the cold light of the commercial reality at the time. Before the event The above are considerations which generally arise upon the tenant s default but there are actions which can be considered beforehand such as: make sure that any delay in payment of rent and service charges is flagged - especially where it goes beyond the tenant s normal payment time; it is easier to recover rent and service charges before the tenant becomes insolvent. Leaving aside the legal position, it is important to react quickly and follow up on rent demands where there are arrears, send in a demand for interest in accordance with the lease - some leases only provide for interest to run from the date of demand make sure that the addresses for the tenant and any former tenants and guarantors are current - possibly consider carrying out insolvency checks make sure that your files are complete: do you have a complete copy of the premises licence, is it in the name of the tenant and do you know where the original is; has the property got an energy performance certificate; are there any issues on the health and safety file and so on? The more likely the tenant is to fall into insolvency, the more important it is to be on top of any management issues as this will save time later and the tenant is more likely to co-operate now rather than later carry out a planning review of your properties which have weak tenants and consider making a planning application for an alternative use or to vary a condition or to enable subdivision, so as to provide greater flexibility for remarketing if your tenant does default. (This would also entail checking the lease to see if there are any restrictions and endeavouring to ensure that the tenant does not object - possibly by making it clear that if you obtain a consent it would not affect the tenant upon rent review.) carry out a title review to make sure that there are no restrictive covenants which would limit your options with regard to planning or otherwise is there any commercial reason to do a deal now with the tenant to avoid insolvency - possibly by way of a (partial) rent free or rent reduction or a surrender of part? This is an overview of some of the more common issues encountered where a tenant is insolvent, which we hope you will find useful. It is by no means comprehensive. We would welcome the opportunity of discussing this and any related issues with you; this might be particularly helpful where you are trying to avoid the issue in the first place! 9
This paper is a joint project between Field Fisher Waterhouse and Poppleston Allen. About Field Fisher Waterhouse LLP Field Fisher Waterhouse is a full service European law firm. With 130 partners, over 220 other lawyers and nearly 300 support staff, we assist a wide range of international clients, advising across a full range of legal issues. Our main areas of practice are real estate, corporate and commercial, IP and technology, banking and finance and regulatory with particular expertise in competition & EU law, dispute resolution, employment and tax. We hold sector prominence in retail, media, technology & telecoms, life sciences & healthcare, hotels & leisure, energy, transport, sports, central government and public regulatory bodies. www.ffw.com About Poppleston Allen Poppleston Allen is a licensing practice dedicated to the leisure industry as is described in the Chambers legal directory as a class act that is fantastic at winning and retaining clients. Established in 1994 it has achieved a high national profile with an experienced and knowledgeable team of 11 solicitors and is based in Nottingham with an office in London. Consistently rated one of the best in the liquor licensing field, Poppleston Allen remains the largest firm of specialist licensing solicitors in the UK who deal exclusively with licensing law and procedures, regulatory crime and training and the firm has a client base ranging from small companies and independent licensees to some of the most important names in the leisure industry. www.popall.co.uk 10
Contacts For further information and advice please contact the authors of this paper (below) or your other regular contacts at the relevant firm. Edward Bannister Field Fisher Waterhouse Landlord and tenant matters/ commercial property e. edward.bannister@ffw.com t. +44 (0)20 7861 4772 Andrew Grimsey Poppleston Allen Licensing e.a.grimsey@popall.co.uk t.+44 (0)115 9487 423 Antony Phillips Field Fisher Waterhouse Property litigation and dispute resolution e. antony.phillips@ffw.com t. +44 (0)20 7861 4606 Robin Tutty Field Fisher Waterhouse Corporate insolvency e. robin.tutty@ffw.com t. +44 (0)20 7861 4189 11
Field Fisher Waterhouse LLP 35 Vine Street London EC3N 2AA t. +44 (0)20 7861 4000 f. +44 (0)20 7488 0084 info@ffw.com www.ffw.com This publication is not a substitute for detailed advice on specific transactions and should not be taken as providing legal advice on any of the topics discussed. Copyright Field Fisher Waterhouse LLP 2008. All rights reserved. Field Fisher Waterhouse LLP is a limited liability partnership registered in England and Wales with registered number OC318472, which is regulated by the Solicitors Regulation Authority. A list of members and their professional qualifications is available for inspection at its registered office, 35 Vine Street London EC3N 2AA. We use the word partner to refer to a member of Field Fisher Waterhouse LLP, or an employee or consultant with equivalent standing and qualifications.