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The commercial property market is unsurprisingly suffering from the UK's economic turmoil, with many tenants feeling the pressure and struggling to trade and subsequently entering into administration.
Landlords of commercial premises will inevitably be affected and could face various challenges depending on what the tenant's administrator intends to do.
Objectives of administration
The main objective of the administration process is to save the insolvent company and its business so that it can continue trading; however, in practice, this is only sometimes achieved. Instead, the company's business and assets will often be sold.
While the company is in administration, a financial and legal moratorium is imposed, which may prevent the landlord from forfeiting a lease, beginning court proceedings or enforcing security, such as a rent deposit. In practice, the landlord's options are, as a result, very limited.
Sale of Company Assets
Often the administration of a company results in the company's assets being sold as part of a sale of the company's business on a going concern basis. Sometimes the sale of a company's assets is agreed upon before the company goes into administration and is then completed immediately after the start of the administration (known as a "pre-pack").
Pre-packs can be a concern for landlords, who will be an unsecured creditor, and administrators will often allow the business purchaser to occupy the premises as a licensee without the landlord's consent, even if this is a breach of the lease to the insolvent company. The administrator may pay landlords the rent, but landlords are often left in the dark regarding the terms of the purchaser's occupation.
If the pre-pack purchaser intends long-term occupation, the landlord should insist upon a formal application to assign the lease and payment of the landlord's reasonable costs of dealing with the application.
Forfeiture
When landlords are notified of the tenant's administration and appointment of administrators, they may wish to be careful about the level of communication with the tenant and of demanding or accepting rent in case the landlord's right to forfeit is waived, and the landlord wants to keep its options open; although a moratorium will be in place around the company, the landlord may still have a right to forfeit the lease and may wish to try to do so. Forfeiture will be subject to the administrator's consent or the court's permission.
Where no pre-pack is agreed upon, and the company in administration continues to trade from the premises, rent that falls due during the period of occupation will rank as an expense of the administration and should be paid in priority to claims of all other creditors (other than those with fixed charges). Landlords should therefore insist that the rent is paid as an expense of the administration, especially if it fell due after the administrator's appointment.
Surrendering the Lease
Suppose the administrator decides they no longer need the premises and move out. In that case, the insolvent company will not be liable to pay rent as an expense of the administration for the period after they have vacated.
Administrators may offer a surrender of the lease to terminate it, but a surrender requires the agreement of both parties and the landlord does not, therefore, have to accept. However, until the lease expires or is surrendered, the lease continues, and it is advisable to seek the administrators' consent before re-marketing the property.