A Landlord’s Rights During Company Insolvency
In this article, we advise on what action your landlord can take if you are in commercial rent arrears, and how you can deal with these issues.
Right of re-entry
At a very basic level, your landlord’s rights include the right of re-entry to the property. This process will invoke forfeiture, which will effectively terminate the lease. To invoke the right of re-entry, the landlord must change the locks to the premises, literally re-entering the premises. Formal notice of forfeiture will be left in the windows or doors confirming the termination of the lease.
This can only be done while no-one is in the building, so is done either in the early hours or late at night. Consequently, if your business operates 24/7, it is almost impossible for your landlord to apply the right of re-entry. The landlord cannot forcibly remove someone from the premises, as this would likely result in criminal charges against them.
As enacting the right of re-entry will terminate the lease, they will, usually, only proceed with this where they believe you can no longer pay them; or if they have another tenant in mind. If you feel the landlord has acted prematurely, you can apply to court for relief from forfeiture. However, you will need to pay all rent arrears as a part of this. The administration moratorium also prevents the landlord from re-entering the premises without leave of the court.
Up until April 2014, landlord’s rights included the right of distraint against your assets. This allowed landlords to uplift assets without the need to go to court if business rent arrears were outstanding. After the changes in 2014, landlord’s distraint was abolished, and Commercial Rent Arrears Recovery (CRAR) introduced.
Unlike distraint, CRAR can only be relied on where:
- There is a formal lease in place, and the rent falls due under the lease
- The lease is commercial: CRAR can only be used under a fully commercial lease. If there is split usage between commercial and residential, it will be necessary to obtain judgement before assets could be uplifted
- The goods are owned by the company: any goods subject to third-party ownership are exempt
Before CRAR can be used, there must be seven days of rent outstanding. Following this, seven clear days notice of the intention to enforce CRAR must be given before enforcement agents can uplift goods. This notice period is your time to act; if possible by paying up the rent arrears. Failing this, where there are special circumstances, you can apply to the court for relief from CRAR. The administration moratorium again will also prevent CRAR from progressing.
Drawing rent deposit
Many landlords will now often require a rent deposit to be paid to protect against commercial rent arrears and damage to the premises. This can often equate to 3-6 months rent, and must be deposited in an account designated by the landlord. The rent deposit will often be protected by a fixed charge, giving the landlord rights to secured creditor status over this specific amount.
The lease will, generally, specify when the landlord is able to draw on the rent deposit. This is often where there have been business rent arrears outstanding for a specific amount of time. The landlord will, typically, give notice of the intention to draw on the rent deposit, in the hope you will pay the arrears, as the rent deposit is their last security.
If the deposit has been drawn down, the landlord will likely start demanding it is replaced. The rent deposit will be a term of the lease and may give the landlord the right to terminate the lease if this is not made. If the deposit remains outstanding, this will allow the landlord the right of re-entry. Again, there is discretion to apply for relief from forfeiture. However, this will be expensive and require the deposit funds and any other commercial rent arrears to be paid.
If your landlord’s rights under the lease or other factors prevent them from using the above methods, they will, generally, need to resort to court proceedings. These are wide ranging and can include:
- Application for forfeiture of the lease
- Possession proceedings
- Applying for a county court judgement
- Issuing a stat demand and winding up petition
- Issue proceedings against any guarantor
A landlord will avoid having to resort to these remedies if necessary, as they are much more expensive and can take several months before any results. The usual applications for relief from forfeiture or the administration moratorium can prevent the majority of these actions from moving forward.
What can I do?
In all cases, we always recommend to firstly try and negotiate with the landlord for repayment of the arrears. As the landlord’s rights are so wide-ranging, it can make them a significant threat to the continuity of your business. If you are unable to pay the arrears, you should ensure you take advice at an early stage. This can be done by contacting one of our business rescue experts.