Of course, the recession hasn’t just affected renters. Commercial property owners may also be at risk of insolvency. If you are a commercial tenant, what should you consider if your landlord goes bankrupt?
You may be lucky and have little effect, or it could be the start of a ghastly 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 your landlord’s Insolvency Practitioner (IP) informing you of the insolvency and telling you to continue paying 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 (termination) for breach of agreement.
Make sure your landlord’s obligations in the lease are met, such as lighting obligations and maintenance of common parts.
Make sure the IP has details of any side letters or other side agreements recording concessions or special agreements you have reached with your landlord that are not covered in the lease. For example, you may have negotiated a personal deal with your landlord to pay rent monthly, instead of quarterly. The IP needs to know this to understand how you pay your rent. Submitting deeds etc. by the landlord can be a hassle, so be as helpful as you can to the IP when they are interested in doing so, for example by providing copies of 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 have the benefit of any terms in the lease that say your own signage must not be obscured by sales boards (particularly important if you’re in a retail store). Make sure the IP complies with any obligation to give advance notice before showing people around and adheres to any hour restrictions on when they can do so.
Is your rental deposit at risk?
If you paid a rental deposit, how secure it is will depend on how well it was set up and documented in the first place.
If the money was simply paid to your landlord, then there is a danger that it will carry over with any other money held by your landlord and become subject to claims by your landlord’s creditors.
To avoid this, when the rent deposit is established, make sure it is paid into a separate account from the landlord’s other funds so that it is easily identifiable in the future.
You must also sign a rent deposit deed with your landlord when the deposit is paid. The deed must detail the circumstances in which your landlord would have the right to take the money from the deposit and must also say that the money from the deposit is held in trust by your landlord or the money belongs to you but is collected from your lessor. This will prevent your landlord’s creditors from claiming the money themselves.
What about service charges and sinking funds?
These payments have a higher potential risk. It depends on how well your lease was negotiated and drafted. You are just another unsecured creditor, unless the money is held in trust. The RICS Service Charges Code of Practice recommends that sink funds be held in trust for the occupants and segregated from the owner’s own money.
What if everything stops? Can/should he step in and do what the owner should be doing?
Check with the IP that the property is still insured. 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 insurance from anyone else (eg other renters).
When your lease is for only part of the property, if the common parts are not properly maintained, you may want to consider doing it yourself or with the other tenants, but you must be careful not to breach anything in your lease. lease. Obligations You will need to get the IP’s permission 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 dialog between you, the other tenants, and the IP.
You may be able to claim damages if you suffer a loss, or be able to offset rent payments, but you should seek specialist advice before contemplating these actions, as much will depend on the type of insolvency that applies to your landlord.
The IP may be an administrator or a trustee or, ultimately, a trustee or (if the landlord is an individual) a bankrupt trustee. Alternatively, the landlord could be entering into some type of voluntary agreement with their creditors. A discussion of the different types of insolvency administrators 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 rental), the goal of IP will generally be to continue your landlord’s business in some capacity or to sell the property at the profit 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 goes bankrupt or goes into liquidation, there is a danger that your landlord’s interest will be forfeited. This is where things can get complicated and where your continued occupancy of the property may be in jeopardy.
If there is a risk of that happening, you should seek specialist legal advice. A discussion of the disclaimer would take too long in an article like this, but briefly, the possibilities are:
- If your landlord owns the freehold, and you refuse, it goes back to the Crown and the Crown accepts no lease obligations if this happens (I’m doing a separate post on this next week, something I’m looking forward to!).
- If your landlord’s interest is in leasing and the IP relinquishes your landlord’s lease, your own lease would also be terminated. Then you may be able to apply to the court for an award order granting you the lease from the landlord (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 lease part of your property. lessor.
You could also have a hard time if your lease is a sublease. If your landlord’s lease (the head lease) allows your landlord (the superior lessor) to terminate (lose) the head lease when your landlord becomes insolvent, then the loss of the head lease would also end your lease. lease. However, all is not necessarily lost, as you may be able to get relief from forfeiture from the court. Another rather complex process outside the scope of this article!
Another possibility, when you are a subtenant and the landlord is behind on the master lease, is that the superior landlord might send you a notice requiring you to pay rent directly to the superior landlord until those arrears are covered. Again, seek advice and verify the validity of the notice. It is a cheap and quick way for the top landlord to keep some income, but it creates a new landlord-tenant relationship between you and the top landlord.
What happens if your landlord goes bankrupt while you are renewing your lease?
It can be very inconvenient if your landlord objects to your lease renewal and then goes to management.
You cannot take the renewal of the lease 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 conduct administration in accordance with its objectives and its right to have its application heard and a new lease awarded. There has been some recent case law on this, but it is clearly something where you would need to get specialist advice.
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 set off 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.
