Avoiding tenant default

In times of increasing economic uncertainty, it is more important than ever that landlords review the economic health of their tenants.  An insolvent tenant can be costly. Landlords who act early are more likely to achieve a better outcome.

Since the commencement of the Enterprise Act 2002 the use of the administration procedure has grown significantly. Administration is the procedure used to rescue a company as a going concern, often resulting in the sale of the companies’ business.

Figures released by the Government this week revealed that the number of company administrations has more than doubled. The number of administrations during the first quarter of 2008 was 54% up on the previous quarter.

The action that you can take against a tenant depends upon the type of insolvency procedure that they are subject to.  These are just some of the consequences of your tenant entering into administration:

Administration – effect on landlords

• Your claims for outstanding rent and dilapidations will rank as unsecured
• You cannot progress a court action or enforce a judgment against the tenant without the permission of the court or administrator
• You cannot forfeit the lease without the permission of the court or administrator
• You could risk inadvertently granting occupancy rights to third parties

Assessing the risk – questions to ask

• Does your tenant have current or a history of rent arrears?
• Has your tenant failed to deal with repairing obligations?
• Is there a lack of activity at the premises?
• Is the rent being paid by or the property being occupied by someone other than your tenant?
• Do you have an adequate rent deposit deed or a guarantee?
• Does your tenant operate in a high risk industry?

Do’s and don’ts

Provided that you act early, you could still be able to forfeit the lease, enforce a debt claim or distrain against the tenant’s property.  If you are concerned that any of the above apply to your tenant, here are some tips on how to reduce the risks:

• Do – act quickly if your tenant defaults
• Don’t – allow your tenant to renegotiate rent payment terms
• Do – make an effort to inspect your property to check who is in occupation and that it is in good repair
• Don’t – let anyone other than your tenant occupy the premises
• Do – keep in touch with your tenant and familiarise yourself with its business