Clive Chalkley
Partner
Head of the Real Estate Sector Team (UK)
Head of Real Estate Litigation (UK)
Article
7
2018 was the "year of the CVA", slashing rents and forcing landlords to get to grips with long-winded CVA proposal documents in an attempt to allow struggling tenants to manage their debts, turn around their businesses and avoid terminal insolvency situations.
The unfortunate reality is that even if they are approved by landlords and other creditors, not all these CVAs will be successful and many tenants are likely to end up in administration.
This article serves as a reminder to landlords of what the insolvency process of administration actually is, the reasons it should be of concern and what they need to bear in mind when managing properties that have been let to a tenant who enters into administration.
Only a few days into the new year and we have already seen HMV appoint administrators, after it announced its second administration in December. In the wake of a whole raft of CVAs that were approved last year, particularly with retail and restaurant chain companies, it's yet to be seen whether the restructurings will be successful or whether these companies too will enter the world of administration. History suggests that many will fail.
In such uncertain times, landlords need to make sure they are fully informed about their options in the event that their tenants go into administration, so that they can take early action to protect their assets and minimise the financial impact on their own businesses.
Administration is a formal insolvency procedure that is carried out in accordance with the Insolvency Act 1986. Once an administrator is appointed their aim is first and foremost to rescue the company so that it can continue to trade. However if that is not possible, then they must seek to achieve a better result for the company's creditors relative to the position they'd be in under a liquidation, or failing that still, to realise the company's property to make a distribution to the secured or preferential creditors.
Compared with CVA's, administration places far greater restrictions on the actions that landlords can take, both in relation to recovering any rent arrears, and also to reclaiming possession of the premises for re-letting to other tenants.
This is due to the statutory moratorium, which places a restriction on landlords' abilities to enforce security or pursue legal proceedings in relation to its property and which comes into effect as soon as an administrator is appointed, or earlier if a notice of intention to appoint an administrator is filed at court.
Either the administrator or the court must consent in order for a landlord to forfeit the lease. Administrators are unlikely to give permission, and courts must balance the interests of landlords against the interests of the creditors and the administration process as a whole. Whether or not permission will be granted depends on the circumstances overall, but suffice to say that terminating the lease will not be quick and easy.
Rent and other arrears will also be difficult to recover because the administrator or court's permission is required before the landlord can:
If you have any queries on tenant administrations, CVAs or other property litigation issues, please contact Clive Chalkley.
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