When BHS collapsed earlier this year, most of the concern was centred on the 11,000 employees who lost their jobs and potentially their pensions.
But they were not the only victims of Britain’s biggest high store liquidation since Woolworths in 2008. The landlords of 164 BHS stores across the country were collectively left with a bill for around £4 million after being left with unpaid rent and empty shops.
Making matters even worse, according to an article in the Financial Times, the portfolio was largely made up of oversized, dilapidated stores that predate online shopping.
A majority of the stores were larger than retailers now require, yet too small for department stores, meaning they will need to be split into multiple units. That is considered the likely future for BHS’s Oxford Street store, whose lease sold for £50 million in April to Polish fashion giant LLP.
About half of BHS’s sites were owned by institutional landlords, with the rest spread between private equity firms, listed property companies, syndicates and private landlords.
Landlord rights to rent payments if a tenant enters administration
For a landlord to be able to collect rent from a tenant who has entered administration, the rent must fall under the category of ‘expense’. Otherwise, a landlord can only bring an unsecured claim against the insolvent tenant’s assets and is likely to get nothing.
Two very important cases have established that rent is an expense and must be paid ahead of creditors. The decision in Goldacre (Offices) Ltd v Nortel Networks UK Ltd (in administration) (2009) EWHC 3389 (ch) established that where administrators use premises, the rent is payable by them (as an expense) as it falls due.
Leisure Norwich (II) Ltd and others v Luminar Lava Ignite Ltd (in administration) and others (2012) B.C.C 497 reinforced the principle in Goldacre, stating:
- Rent payable in advance that falls due before the administration is not payable as an expense. This applies even if the administration starts part way through the quarter (or even the day after) and the administrators use the property during that period. In this scenario, a landlord can only bring an unsecured claim for the quarter’s rent and will not get priority payment as an expense.
- Where the rent date falls during the period when the property is being used by the administrators, all that rent is payable even if the administrators vacate later during the quarter.
Can a landlord forfeit a lease?
Most commercial leases provide a right for the landlord to forfeit the lease in the event of a tenant becoming insolvent or if rent has not been paid for a specified period (usually 14 or21 days from when it is due), and this right can be used in the case of voluntary liquidation or receivership. However, if a company tenant is in compulsory liquidation or administration, the landlord cannot forfeit without permission from the court or consent from the liquidator or administrator.
Often, if the premises are not required and rent is not being paid, administrators will often give their consent to forfeiture proceedings being brought or surrender the lease in an effort to mitigate further losses (on the landlord’s part).
Forfeiture means your lease will be terminated with immediate effect; therefore, the right to claim future rent in administration, either as a debt or damages will be lost. It is also imperative to remember that the right of forfeiture can be waived in the event you demand or accept rent from an insolvent tenant.
Seizing an insolvent tenant’s goods and selling them to recuperate lost rent
Prior to April 2014, a landlord could exercise the common law remedy of ‘distress’ to recover unpaid rent. Distress gave a landlord the right to enter their tenant’s premises unannounced (so tenants did not have the opportunity to hide goods) and seize assets and stock for the purposes of selling them.
Naturally, this remedy caused significant concern for insolvency practitioners, whether they were trying to help the business trade its way out of administration or utilise the value of every available asset to pay creditors.
On 6th April 2014, the UK’s remedy of distress for rent was replaced with a new statutory mechanism – Commercial Rent Arrears Recovery (CRAR). Under this scheme, landlords must give at least seven clear days’ notice before the landlord’s enforcement agent attends the premises to exercise CRAR.
Financially viable tenants will normally make the payment of rent a top priority. Therefore, a commercial tenant falling into arrears sets off alarm bells for any landlord. CRAR is most likely to deprive landlords of their advantage when a business is unviable and past the point of no return. This is because the seven-day notice period gives the tenant the opportunity to seek advice on insolvency. If an administrator is appointed, then the landlord cannot forfeit the lease without going through the expense of seeking the courts permission.
How a landlord can protect themselves from losses caused by a tenant’s insolvency
As well as ensuring there is a guarantor or surety to the lease, landlords should consider obtaining a rent deposit equal to at least six months’ rent as protection in the event that the tenant fails to pay. The rent deposit can be drawn down against rent arrears in a liquidation scenario without falling under the unlawful preference provisions of the insolvency legislation.
If you suspect your tenant is in financial difficulty, the most imperative point is to seek legal advice quickly. An experienced commercial property solicitor can provide pragmatic advice on the steps you can take to mitigate your losses and protect your property.
Saracens Solicitors is a multi-service law firm based in London’s West End. We have dedicated and highly experienced commercial property solicitors who can assist you in the event of a tenant becoming insolvent. For more information, please call our office on 020 3588 3500.
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