Insolvent Tenant – The Tenant’s view
As a corporate tenant we will struggle to pay this quarter’s rent. What can we do to ensure that we can continue to trade from our premises?
In order to prevent your landlord from seizing assets from the premises, bringing a County Court debt claim against you, or even forfeiting the lease, it will be necessary to consider one or more of the following insolvency regimes.
Part A1 moratorium
Introduced by the Corporate Insolvency and Governance Act 2020, a Part A1 moratorium affords a short respite from enforcement action. The moratorium is supervised by an insolvency practitioner who takes the role of “monitor”, but the directors will remain in control of the company’s management. The period of protection is 20 business days, although this can conditionally be extended by a further 20 business days, and further extensions are possible subject to a court’s discretion or creditor consent.
During the moratorium the court’s permission is required if a landlord wishes to
- enforce security against the company’s assets (some rent deposits are exempt)
- initiate / continue any legal process
- forfeit the lease
These restrictions will apply to the recovery of rent that has accrued due prior to the moratorium, but the company will be required to pay rent on a day-to-day basis during the period of moratorium.
Company Voluntary Arrangement
A CVA is a compromise made between a company and its unsecured creditors, typically resulting in the reduction of the company’s debts. A proposed CVA requires the approval of at least 75% (by value) of the company’s creditors. A CVA will almost certainly address rent arrears, and the tenant’s liability for all other sums that will become due under the lease going forward. Once bound by the CVA, the landlord is prevented from taking any steps against the company that the CVA prohibits. The landlord’s right to forfeit the lease remains, although the CVA may prescribe notice procedures for a landlord to follow and might even amend when the right to forfeiture is triggered. A CVA is often preferred to Administration (see below) as the company’s directors continue to run the business, and the risk of employee redundancy may reduce.
Administration
An Administration is commenced by filing a formal application at court, or by giving notice to creditors and then simply lodging prescribed documents at court. Once an application is filed, or documents lodged, an interim moratorium comes into effect. A full moratorium arises when an administrator is appointed. The company’s property remains vested in it, but the company acts by its administrator who is an officer of the court.
Again during the statutory moratorium the consent of the administrator, or the permission of the court, is required if a landlord wishes to
- enforce security against the company’s assets (some rent deposits are exempt)
- initiate / continue any legal process
- forfeit the lease
Each of these procedures will require the advice of insolvency practitioners, and attendant professional fees. A quicker and more cost-effective alternative might be to seek a constructive dialogue with your landlord and explore whether some sort of payment restructuring might be negotiated.
