The recession hasn’t just hit renters, of course. Commercial property owners can also be at risk of insolvency. If you are a commercial tenant, what should you pay attention to if the landlord files for bankruptcy?
You may be lucky and that will affect you little, or it could be the beginning of a terrifying Kafkaesque nightmare!
This is a brief summary of some of the things to think about.
Will they tell you?
You will likely receive a letter from the insolvency administrator (IP) dealing with the insolvency of your landlord informing you of the insolvency and instructing you to continue to pay your rent, service charge, insurance contributions, etc., but from now on to a different bank account. . If the IP does not provide you with enough information or if you have any questions, you should contact the IP immediately.
What should you do?
Please continue to fulfill your obligations under your lease as before. If you don’t, then the IP still has the benefit of your landlord’s rights to terminate your lease (loss) for breach of the agreement.
Make sure your landlord’s obligations in the lease are met, for example, any obligations to light and maintain common parts.
Make sure the IP has details of any supplemental letters or other supplemental agreements that record special concessions or agreements that you have made with your landlord that are not addressed in the lease. For example, you may have negotiated a personal deal with your landlord to pay your rent monthly, rather than quarterly. The IP must know this to understand how he pays the rent. The presentation of deeds, etc. from your landlord can be a disaster, so be as helpful to the IP as possible when it is in your interest to do so, for example by providing copies of any missing letters or deeds.
The IP may be looking to sell the property, so check what your lease says about allowing your landlord to show people around and whether your landlord can put up a “for sale” sign. If signs are allowed, check to see if you benefit from any condition in the lease that says that your own sign must not be obscured by sales signs (particularly important if you are in retail). Make sure the IP complies with any obligation to give advance notice before showing people around and adheres to time restrictions on when they can do so.
Is your rental deposit at risk?
If you paid a rental deposit, the security will depend on how well it is set up and documented in the first place.
If the money was simply paid to your landlord, there is a danger that it will be swept up with any other money held by your landlord and subject to the claims of your landlord’s creditors.
To avoid this, when the rental deposit is established, make sure that it is paid into a separate account from the rest of the landlord’s money so that it is easily identifiable in the future.
You must also sign a rental deposit deed with your landlord when the deposit is paid. The deed must detail the circumstances in which your landlord would be entitled to withdraw the money from the deposit and must also say that the deposit money is in trust by your landlord or that the money belongs to you but is charged to your landlord. This will prevent your landlord’s creditors from claiming the money for themselves.
What about service charges and sinking funds?
These payments are potentially at higher risk. It depends on how well your lease was negotiated and drafted. You are just another unsecured creditor, unless the money is in trust. The RICS Service Charge Code of Practice recommends that sinking funds be held in trust for the occupants and separated from the owner’s money.
What happens if everything stops? Can / should you step in and do what your landlord should be doing?
Check with the IP that the property is still secured. If not, you may need to consider insuring the property yourself. However, this could be problematic as you need to avoid any double insurance and you may not be able to recover the cost of the insurance from anyone else (for example, other renters).
When your lease is just a part of the property, if the common parts are not properly maintained, you may want to consider doing it yourself or together with the other tenants, but you need to be careful not to breach any of your leases. . obligations. You would need to get permission from the IP to do this and it is unlikely that you will be able to recover the costs from someone else. In these circumstances, try to open a dialogue between yourself, the other tenants, and the IP.
You may be able to claim damages if you suffer a loss, or be able to offset your rent payments, but you should consult with a specialist before contemplating these actions, as much will depend on the type of insolvency that applies to your landlord.
The IP can be a trustee or trustee, or ultimately a liquidator or (if the owner is an individual) a bankrupt trustee. Alternatively, the landlord could be entering into some kind of voluntary arrangement with his creditors. An analysis of the different types of insolvency practitioners is beyond the scope of this article.
Will your lease survive?
It is highly unlikely that your lease will contain provisions that allow it to be terminated if the landlord becomes insolvent.
Assuming the property has value and a good income stream (your rent), the IP’s goal will generally be to carry on your landlord’s business in some way or to sell the property for the benefit of your lease. In those circumstances, the IP will want to maintain a good relationship with you and any other tenants. If all goes well, it should have little effect on you.
On the other hand, if the property is not economically viable and is effectively a liability rather than an asset, then if your landlord is bankrupt or in liquidation, there is a danger that your landlord’s interest will be denied. This is where things can get complicated and where your continued occupation of the property can be in jeopardy.
If there is a risk of that happening, you should seek specialized legal advice. A disclaimer discussion would take too long in an article like this, but briefly, the possibilities are: –
- If your landlord owns freehold, and it is denied, it reverts to the Crown and the Crown does not accept lease obligations if this happens (I’m doing a separate post on this next week, something to look forward to!).
- If your landlord’s interest is the lease and the IP denies your landlord’s lease, your own lease would also disappear. Then you could ask the court for a vesting order that gives you the landlord’s lease (the rules are quite complex). But, the new lease would be on the same terms as the landlord’s old lease, not your old lease, which may not be what you want if you only had a lease for part of your landlord’s property.
You may also have difficulties if your lease is a sublease. If your landlord’s lease (the main tenancy) allows your landlord (the superior landlord) to terminate (lose) the main tenancy when your landlord becomes insolvent, then the loss of the main tenancy would also terminate your lease. . However, all is not necessarily lost, as you may be able to get relief from court forfeiture. Another rather complex process outside the scope of this article!
Another possibility, when you are a sub-tenant and your landlord is delinquent under the main lease, is that the superior landlord could notify you requiring you to pay your rent directly to the superior landlord until those arrears are covered. Again, seek advice and check the validity of the notice. It’s a cheap and quick way for the superior landlord to maintain some income, but it creates a new landlord-tenant relationship between you and the superior landlord.
What happens if your landlord goes bankrupt while you renew your lease?
It can be very uncomfortable if your landlord objects to your lease renewal and then goes to management.
You cannot take the contract renewal to court without obtaining the consent of the IP (in this case, the administrator) or the permission of the court. In deciding what to do, the court must strike a balance between the IP’s rights to carry out an administration in accordance with its objectives and its right to have its request heard and a new lease awarded. There has been some recent case law on this, but it is clearly something you would need to consult with a specialist about.
As you can see, your landlord’s bankruptcy can lead to a number of different outcomes depending on the circumstances. It can be simple and have little effect, or it can trigger a sequence of events over which you have little or no control.
Therefore, it is advisable to be aware of the possible implications of your landlord’s insolvency and to seek legal advice at an early stage.