Legal development

Ten Things to Know If Your Tenant Goes Into Administration

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    1. My tenant is in administration, do they have to pay the full rent and is the administrator personally liable?

    The company in administration has to pay rent as an administration expense for each day that the company occupies or uses the property for the benefit of the administration. The administrator is not personally liable, but the rent is payable as a priority expense ahead of the administrator's fees.

    In almost all cases, administration expenses are paid in full. The amount of rent payable as an expense will, unless the landlord agrees otherwise, be the full passing rent due under the lease or potentially whatever compromise the landlord and tenant have previously agreed (provided such compromise does not terminate on the administration). Administrators take the view that they are not required to pay rent in accordance with the usual payment frequencies under the lease and so will usually pay rent monthly in arrears rather than quarterly in advance while in administration.

    2. My tenant is in administration, can they disclaim the lease?

    No, unlike a liquidator, an administrator cannot disclaim a lease. However, an administrator can decide that they don't need the premises anymore and move out.. If they do that, the tenant company will not be liable to pay rent as an administration expense for the period after they have vacated.

    3. My tenant is in administration, if the administrator offers a surrender do I have to accept?

    As the administrators can't disclaim the lease, they may offer a surrender of the lease to terminate it. A surrender requires the agreement of both parties and does not therefore have to be accepted by a landlord.

    If considering accepting a surrender, a landlord will need to be aware that doing so may bring forward the landlord's liability for business rates. Any surrender in these circumstances is usually on a "drop hands" basis where there is no surrender premium or payment in respect of dilapidations.

    4. My tenant is in administration and the administrators are seeking to return the keys to the premises but I don't want to accept a surrender. What should I do?

    In this scenario, a landlord should acknowledge receipt of the keys but should make it clear that acceptance of the keys is for security reasons only, that the landlord does not accept the surrender of the lease and that the lease is continuing.

    5. My tenant is in administration, can I forfeit the lease?

    Where a tenant is in administration, the landlord's right to forfeit the lease is subject to administrator's consent or the court's permission. Whether or not the administrator will consent, or the court will grant permission, depends upon a number of factors including whether the property is needed to achieve the purpose of the administration, and the detriment caused to the landlord if consent/permission is not granted. If the administrator is trading the business from the relevant site, or has sold the business and assets of the tenant and granted a licence to occupy to the buyer where deferred consideration is payable to the administrators, it is unlikely that forfeiture will be available.

    6. My tenant is in administration, can I draw down on the rent deposit?

    Yes, whilst an administrator may try to argue the contrary, it is usually possible to draw down on a rent deposit, although it does depend on the terms of the rent deposit deed and how the deposit is held.

    Landlords should consider the timing of when to draw down on the rent deposit though as a tenant will not be required to top up a rent deposit as an expense of the administration. Accordingly, landlords should consider carefully whether it is best to save any rent deposit for any pre-administration arrears or other arrears where the premises are being used for the benefit of the administration, since rent for this period of post-administration beneficial occupation is payable as an administration expense.

    7. My tenant is in administration, can I still claim on my guarantee?

    The tenant's administration should not impact a third party guarantee unless there are specific provisions within the arrangement itself. If the guarantee is with a former tenant or former guarantor, a section 17 notice under the Landlord and Tenants (Covenants) Act 1995 will still need to be served on that party within six months of the sums falling due.

    If the guarantee has been provided by a group company of the tenant, it is possible that the guarantor might also be in insolvency proceedings.

    8. My tenant is in administration and has sold their business to another company which is occupying under a licence to occupy. What are my options?

    Where the insolvent tenant has let the buyer into occupation under licence, this is likely to be a breach of the lease. However, the terms of the licence will probably involve continuing to pay the pass through rent during the licence period (which the buyer pays to the tenant as a licence fee, and the tenant passes on to the landlord). Meanwhile, the buyer is likely to negotiate with the landlord for an assignment, or surrender and regrant, of the lease. Depending on the market, the buyer may also seek to negotiate a lower rent or different lease terms as part of the assignment.

    A landlord in this scenario has various options including potentially seeking forfeiture of the lease and finding a new tenant, consenting to the assignment on the requested terms, seeking to negotiate better terms, or not consenting to the assignment (provided there are reasonable grounds for withholding consent, such as poor covenant strength).

    Landlords should take care in any responses to administrators or third parties so that the right to forfeit is not waived.

    9. My tenant is in administration and not trading from the property. Can I market the property to relet it?

    Although the tenant may not be trading from the property, the lease still continues until such time as it expires or is surrendered by agreement. Accordingly, it is advisable to seek the consent of the administrators to re-market the property. However, if the tenant is not using the property, such consent should ordinarily be forthcoming.

    10. My tenant is in administration, how do I make a claim against the estate for sums not paid by the tenant that aren't an expense?

    To claim for unpaid unsecured amounts that are not payable as an expense of the administration, landlords will need to submit a proof of debt claim to the administrators. Unfortunately, unsecured creditors often recover only a fraction of their claim in a typical administration, and sometimes nothing at all. Administrators are required to provide an indication of the likely dividend payable to creditors when they issue their proposals for the administration, which they must do within 8 weeks of their appointment.