If your business is experiencing serious financial difficulties, your commercial property may be one of your biggest concerns. You may have several years remaining on a commercial lease, significant rent commitments and other obligations under the lease.
Becoming insolvent does not necessarily mean that a commercial lease immediately comes to an end. What happens to the premises will depend on the terms of the lease itself, the type of insolvency affecting the business and what subsequently happens to the individuals, partnership or company.
AFG Law’s Commercial Property team can advise both commercial tenants and landlords on the property and lease implications of insolvency. For tenants, we can review your lease, explain your ongoing obligations and advise on options for dealing with the premises. For landlords, we can advise on your rights where a tenant becomes insolvent, stops paying rent or is otherwise in breach of the commercial lease.
Where specialist advice on the insolvency process itself is required, this should be obtained separately from an insolvency practitioner.
Does insolvency automatically end a commercial lease?
Usually, insolvency will not end a commercial lease. The fact that a tenant has become an tenant does not by itself mean that its commercial lease simply disappears.
The starting point is the lease. Commercial leases commonly contain provisions dealing with insolvency, non-payment of rent and the circumstances in which the landlord can seek to bring the lease to an end. Each lease will be different to it is important to consider the particular terms of the Lease.
The position can then be affected by the particular insolvency procedure. Different rules can apply during company’s administration or liquidation, a voluntary arrangement and other insolvency processes for an individual.
From a property perspective, the important questions are whether the business will continue occupying the premises, whether rent will continue to be paid and whether the lease is likely to continue, be assigned, surrendered, forfeited or otherwise brought to an end.
Do I still have to pay rent if my business becomes insolvent?
Entering an insolvency process does not simply remove the tenant’s historic and ongoing liabilities under the lease.
If the business continues to occupy premises, the treatment of rent will depend on the circumstances and the particular insolvency process. An insolvency practitioner (if appointed) will therefore need to consider the premises and whether they are required for the continued operation or realisation of the business.
From the tenant’s perspective, it is important to establish what is happening with the property rather than assuming insolvency means you can simply hand back the keys.
Outside of any contractual or statutory mechanism for ending the lease, the tenant remains subject to its obligations under the lease.
Can the landlord forfeit the lease?
A commercial lease will often contain a forfeiture provision allowing the landlord to seek to end the lease following particular insolvency events. These can include unpaid rent, breaches of other lease obligations and specified insolvency events. This can potentially allow the landlord to forfeit the lease through court action or, where legally available, on notice and by peaceable re-entry.
However, insolvency can significantly change the landlord’s ability to take enforcement action. For example, where a company is in administration, a statutory moratorium applies. A landlord cannot normally forfeit the company’s lease by peaceable re-entry or commence or continue certain legal processes without the consent of the administrator or permission of the court. It is therefore important
The fact that the lease contains an insolvency forfeiture clause therefore does not necessarily mean the landlord can immediately exercise it.
What happens to unpaid rent?
Rent that was already outstanding when insolvency began will need to be considered as part of the wider insolvency position. A landlord may ordinarily have several options for pursuing unpaid rent, including debt proceedings and, where the requirements are met, Commercial Rent Arrears Recovery (CRAR).
CRAR allows qualifying commercial landlords to use enforcement agents to take control of goods to recover certain rent arrears without first obtaining a court judgment.
Once formal insolvency proceedings have started, however, restrictions can apply to the landlord’s normal remedies. The precise position depends on the procedure involved and when enforcement action was taken.
For the tenant, this means existing arrears cannot simply be considered separately from the insolvency. The commercial lease needs to be reviewed alongside the wider financial position of the company.
What happens to the rent deposit?
If a rent deposit deed was entered into when the lease was granted or assigned, it should be reviewed carefully.
The deed will usually set out the circumstances in which the landlord can draw down money from the deposit, which may include failure to pay rent or another breach of the lease.
The precise position can depend on how the deposit arrangement was structured and the wording of the deed. If insolvency is anticipated, it is therefore useful to establish how much is held and what rights the landlord has in relation to it.
What if someone guaranteed the lease?
A lease may also have additional security behind it. For example, a director, parent company or other party may have provided a guarantee. Alternatively, where a lease was previously assigned, an Authorised Guarantee Agreement may have been entered into by an earlier tenant.
The insolvency of the current tenant does not necessarily remove the landlord’s rights to enforce the lease against a guarantor.
This can be particularly important when considering how insolvency will affect the landlord and the parties connected with the lease. The lease, guarantee documentation and any Authorised Guarantee Agreement should therefore be reviewed together. Often, enforcement of a guarantee when the tenant is insolvent can be the best option and the quickest means to receive payment of rent.
Can the lease be assigned to another business?
Potentially. If the business or some of its operations are being transferred, there may be circumstances in which another company wants to take over the premises.
Whether the lease can be assigned will depend on its terms. Most commercial leases contain provisions controlling assignment and may require the landlord’s consent.
An assignment does not happen automatically because a business or its assets are being sold. The property element of the transaction needs to be dealt with correctly, including any required landlord consent and licence to assign.
Where a proposed business sale depends on retaining the premises, the lease should therefore be considered at an early stage.
Can I surrender the commercial lease?
A negotiated surrender may sometimes provide a way for the landlord and tenant to bring the lease to an agreed end. Whilst, the landlord does not generally have to accept a surrender simply because the tenant can no longer afford the premises it is often a better option for the landlord.
If a surrender is agreed, the terms need to deal with matters such as outstanding rent, the condition of the property, reinstatement obligations and any other sums due under the lease.
It is important not to assume that returning the keys automatically releases the tenant from its liabilities. The ending of the lease, the landlord’s acceptance of the surrender and the documentation recording it all need to be considered properly.
What should I do about my commercial lease if my business is facing insolvency?
If your business is experiencing serious financial difficulties, review the commercial lease as early as possible. In particular, you should establish:
- how long remains on the lease;
- whether there are outstanding rent or service charge payments;
- whether there is a break clause;
- what the lease says about insolvency and forfeiture;
- whether there is a rent deposit or guarantor;
- whether the lease can be assigned; and
- whether the premises are needed for any continuing business.
This information can help you understand the property commitments facing the business and the options available.
It is often best to communicate with the landlord and open a channel of communication.
An insolvency practitioner can also advise on the company’s financial position and the relevant insolvency process. A commercial property solicitor can advise on what that situation means for the lease itself.
Advice on commercial leases and insolvency
A commercial lease can represent a substantial ongoing commitment, so it should be considered early when a business is experiencing financial difficulty.
Insolvency does not automatically terminate the lease, and the position can be more complicated once formal insolvency proceedings begin. The lease may contain rights relating to forfeiture, assignment, surrender, rent deposits and guarantees, while statutory restrictions can affect what action the landlord is entitled to take.
AFG Law’s Commercial Property team can review your lease and advise on your rights and obligations relating to the premises. We can also advise on assignments, negotiated surrenders and other commercial property arrangements where a business is restructuring or facing financial difficulties.