Insolvency Property Issues


Insolvency Property Issues information in this section:

Insolvency Issues For Landlords

During the economic downturn, a tenant entering into an insolvency process was a big issue for landlords. Often landlords were owed huge amounts of rent but were restricted from taking any steps against the tenant due to the statutory moratorium put in place when a tenant entered administration or liquidation.

The key issue for landlords when a tenant is insolvent or on the verge of insolvency is to ensure that rent arrears are paid and future rent payments secured. Unless landlords have protection in place such as a rent deposit deed or a personal guarantee, it can be difficult for landlords to protect their position. Balanced with this, landlords need to take into account commercial considerations in the long term as pushing hard for rent in the short term could result in the premises becoming empty and empty rates liabilities arising.

Landlords and Pre-Packs

A pre-pack is an agreement whereby the insolvent company’s business and/or assets are sold shortly after the company enters into insolvency. Often, pre-packs are negotiated by insolvency practitioners (IPs) prior to the company entering into an insolvency situation. Pre-packs are commonly used in association with a company going into administration but they can be used when a company enters liquidation.

Pre-packs are commonly used in circumstances where part of the company is still viable but commercial factors mean that urgent steps need to be taken to maintain that part of the company. Pre-packs are seen as the best way to maximise the value of an insolvent company, to maintain business continuity and lessen the damage to the company’s goodwill. Pre-packs also usually mean that the company’s employees can be retained, particularly those who are key to the business.

As pre-packs allow the company to continue to exist, pre-packs are very relevant to landlords as the company purchasing the assets in the pre-pack are likely to remain in occupation of the premises. This is usually by way of a licence given by the administrators or liquidators although sometimes the purchaser will want to negotiate with the landlord the assignment of the old lease or the granting of a new one.

Following a pre-pack, landlords are able to claim rent arrears. Rent arrears up to the date of the company’s insolvency can be claimed by completing a proof of debt form and submitting this to the administrator or liquidator. There is however no guarantee that the rent arrears will be paid as it will depend on the insolvent company’s assets and the number of other creditors. In addition, landlords may be able to draw down any rent deposit facility but will need to put the administrator or liquidator on notice of this.

Landlords are also able to claim rent for when a company acting through its administrator or liquidator continues to use leasehold premises. The recent case surrounding the administration of Game Station clarified that:

  • Where an administrator or liquidator uses the premises for the purposes of the administration or winding up, then rent is payable as an expense.
  • The period of use and rent payable is treated as accruing day-to-day. This is irrespective whether rent is payable in advance or in arrears.
  • The date upon which rent falls due and whether that was before the company used the property for the purposes of administration or liquidation is irrelevant.

Unfortunately however the decision of the court in the Game Station case does leave some uncertainty surrounding rent passing between landlords and insolvency officeholders. Some issues that may arise include:

  • How much rent will be payable if the administrator or liquidator only uses part of the premises? Will the insolvency office holder have to pay the whole of the rent or just an apportionment?
  • If the administrator grants a licence to a new company and the licence rent is less than the headline rent then what rent will be payable? It is likely that the headline rent will be payable but this would be open to debate and negotiation.

It is important to note that if as a landlord you draw down any rent deposit or make a claim against any guarantors, then you will not be able to make a claim in the tenant’s administration for those payments.

Steps that can be taken against a company in administration

Once a company enters administration, a statutory moratorium is put in place meaning that no steps can be taken against the company or its property without leave of the court or the consent of the administrator. Furthermore, an interim moratorium is put in place from the moment a company files at court a notice of intention to appoint administrators or issues a court application to appoint administrators.

This can leave landlords in a very difficult situation as you will not be able to take any steps against the tenant or its property. This includes trying to forfeit the lease.

Before making an application to the court to lift the moratorium, a landlord must always seek consent from the administrator. Only if the administrator refuses to provide consent should an application to the court be made. When deciding whether to lift the moratorium, the court will look at a number of factors:

  • Does the creditor have a proprietary right?
  • Will the steps the creditor takes to repossess goods and/or property impede on the administration? If so, it is unlikely the court will lift the moratorium.
  • Balancing the rights of the creditor making the application against other creditors.
  • Whether refusing the application would cause significant loss to the creditor making the application.
  • The respective financial positions of the company and the applicant, the administrator’s proposals, the effect of allowing/refusing the application, the timing of the application (any application must be made promptly) and the general conduct of the parties.
  • Is the applicant an unsecured creditor looking to continue with a monetary claim? If so, it is unlikely the court will lift the moratorium.

Challenging pre-packs and steps taken by administrators

Both pre-packs and steps taken by administrators can be challenged by landlords. Whether any such challenges would stand up will depend on the circumstances of each individual case and something that our solicitors could advise on.

A common ground upon which an administrator’s conduct could be challenged is if an administrator failed to pass onto the landlord any rent collected from a purchaser following a pre-pack sale. Court applications that landlords might want to consider include:

  • An application to remove an administrator.
  • An application that the administrator’s conduct unfairly prejudiced the landlord.
  • An application for misfeasance by the administrator (i.e. misapplying or retaining monies or property of the company).

Company Voluntary Arrangements (CVAs)

CVAs are arrangements between an insolvent company and its creditors that are supervised by an Insolvency Practitioner (commonly referred to as a “Supervisor”) in regards to the repayment of the company’s debts. CVAs have to be approved by the court as they often mean a compromise being reached in regards to the company’s debts.

CVAs are becoming increasingly popular particularly in the retail sector. Issues can arise for landlords following an insolvent company entering into a CVA. Those issues include:

Is the CVA binding?

o The Insolvency Act 2000 makes clear that all creditors of an insolvent company are bound by the CVA whether or not they received notification of the creditors meeting. If a CVA is approved by 75% of the creditors then it will be binding on all creditors, irrespective of whether you as landlord approved the CVA.

What is the position regarding rent arrears and future rent payments?

  • CVAs can compromise, postpone, extinguish or modify rent arrears owing up to the date the CVA was entered into. It can also release former tenants under old leases if the current tenant is released from the lease. Furthermore, once a CVA is entered into, the rent arrears become a debt due under the CVA.
  • A CVA can also affect future rents but only if the CVA specifically covers future rent payable to the landlord. Otherwise, landlords should be able to recover future rent from the tenant in the normal way.

What effect does the CVA have on guarantees?

  • Many landlords have the benefit of either a rent deposit or guarantee. Quite often, parent companies give guarantees for their subsidiaries. CVAs can attempt to “guarantee strip” i.e. remove or compromise the guarantors’ obligations to the landlord. Whilst case law has held that guarantee stripping is possible it will not be allowed where it is prejudicial to the landlord. When deciding if there has been prejudice, the court will look at whether the landlord would have been better off if the insolvent tenant was placed into liquidation as against the outcome of the CVA. If the landlord would have been better off had the tenant entered liquidation, it is likely the landlord will have been unfairly prejudiced.

Can the CVA be challenged?

  • It is possible to challenge a CVA if unfair prejudice is caused or there is “material irregularity”. Any challenge has to be made to the court within 28 days of the CVA being approved. This will depend entirely on the circumstances of the case and our solicitors can provide advice on this.
  • If the court is satisfied there has been prejudice or material irregularity, the court has the power to revoke or suspend approval of the CVA, give a direction that there be a further meeting of the creditors so that the CVA can be reconsidered or give any other directions it sees fit in regards to what should be done following the CVA being entered into.

Our expert property litigation solicitors can advise on all property aspects that arise from a tenant becoming insolvent. Please contact a member of the team if any of the above issues affect you and you need advice.

Insolvency Issues For Tenants

Landlords with Freehold Interest

Rent payments – If a freehold landlord enters into an insolvency process, rent will still be payable. Depending on the procedure being followed, rent will be paid to the liquidator, administrator, CVA supervisor or fixed charge/LPA receiver.

Rent deposits – If a rent deposit is held by the freehold landlord and the landlord becomes insolvent, the money held on trust by the landlord for the tenant will only be safe from creditors if it is held in a separate bank account. If the rent deposit is in one of the landlord’s general current accounts, the rent deposit monies could be used to settle claims from the landlord’s creditors and it will be difficult for a tenant to argue that it has a claim on the money.

Landlord’s failure to comply with lease covenants – If an insolvent landlord does not comply with its covenants under the lease, there is a little to gain from issuing a claim for damages or specific performance for breach of the lease. However, as a tenant, you may be able to terminate the lease and treat the lease as at an end if the landlord’s failure to comply with its covenants is extensive. This is known as a “repudiatory breach”. In order to establish the landlord is in repudiatory breach of the lease, the breach(es) must go to the root of the lease and the effect of the breach(es) must deprive a tenant of its substantial enjoyment of the premises.

Lease renewals and rent reviews – Tenants should be aware that under the Landlord and Tenant Act 1954, administrators and liquidators have the power to enter into lease renewals and settle rent reviews.

Disclaimer – if a landlord’s liquidator renounces the landlord’s freehold interest in the property then that interest reverts to the Crown. Your interest in the property remains but tenants have no right to require the Crown to comply with any of the insolvent’s landlord’s obligations under the lease. Tenants can however apply for an order asking that the freehold interest be assigned to you.

Landlords with Leasehold Interest Only

Rent payments – The Commercial Rent Arrears Recovery Procedure (more commonly known as CRAR) enables a superior landlord to collect rent directly from an undertenant if the intermediate tenant is in rent arrears. If the undertenant fails to make rent payments to the superior landlord, the CRAR procedure can be invoked by the superior landlord against the undertenant. However, before doing so, superior landlords need to make sure that commencing the CRAR procedure will not prevent it from taking any other action e.g. forfeiting the lease.

Disclaimer – On disclaimer, a superior landlord’s liabilities come to an end but the liabilities of the other parties (including the undertenant) do not. Undertenants are not entitled to walk away from their lease if the intermediate landlord’s lease comes to an end. Due to this, undertenants may want to arrange for the superior lease to be assigned to it so that there is some certainty in regards to the undertenants’ position. The superior landlord can also apply to the court to vest the superior lease in the undertenant. However, the court will look closely at the terms to be imposed on the undertenant. If the undertenant declines to accept the order then the undertenant will be excluded from the property and its obligations under the lease will come to an end.

Forfeiture – a superior landlord can forfeit the superior lease. This will terminate the lease. If the undertenant wants to obtain relief from forfeiture, the undertenant will have to settle the rent arrears owed and the superior landlord’s costs. The court then has the power to grant a new lease to the undertenant and has a wide discretion as to what terms go into the lease save that the new lease cannot be for a longer term than the original lease.

Our expert property litigation solicitors can advise on all property aspects that arise from a landlord becoming insolvent. Please contact a member of the team if any of the above issues affect you and you need advice.

Enforcement of Security

Types of Security

Broadly speaking, lenders take security over land either by way of a mortgage or charge. The form of security taken depends on the significance of the land to the borrower’s business or the relevance of the land to the particular transaction. Where land or property is a material asset or monies are being loaned to acquire or redevelop land, lenders will often want to take a legal mortgage. Conversely, where the land is less significant, lenders may be prepared to accept an equitable mortgage or charge.

Registering the Security

Any security taken in respect of a company’s land has to be registered at Companies House and also at the Land Registry. If security is taken in respect of unregistered land (rare nowadays) then granting security will usually trigger first registration of the land at the Land Registry. If first registration is not triggered, the security can be registered at the Land Charges Department.

Enforcing Security

If a borrower does not keep up with its borrowing obligations, then lenders will need to consider the methods open to it when enforcing its security.

If the charge obtained by the lender is contained in a debenture, then the principal method of enforcement will be placing the borrower company into administration. The administrator will then have to collect the secured assets of the company.

For most lenders, taking enforcement action is seen as a last resort. Lenders will typically first consider the following options:-

  1. Refinancing i.e. the existing loan being repaid with a new loan which has more favourable repayment conditions and/or less onerous interest rates.
  2. Restructuring i.e. changing the business structure of the borrower company so that the business runs more effectively and profitably. This should make repayment of the debt more likely.
  3. The lender (or another party) providing additional financing in return for further security being granted by the borrower.
  4. Seeking a winding-up order against the mortgagor (although this would be very unusual).

However, if the above options are not available, a lender may decide that enforcing its security is the best or only option available to it. A lender may decide that putting a company into administration will not appropriate and will not mean a return of the lender’s monies. Lenders may also not want to risk providing any further funding if it considers that will not be repaid. In circumstances such as these, a lender that has security over land owned by a company may decide that enforcing a charge or mortgage is the best course of action.

When enforcing a charge or mortgage (which must be executed as a deed), the remedies available to a lender normally include the following:

  1. The power to take possession of the land.
  2. The power to appoint a receiver or administrator.
  3. The power to sell the land without resorting to the court.
  4. The right to apply to the court for foreclosure (although this is rarely exercised).

The appointment of a receiver tends to be the favourable method used by lenders. Most lenders are unwilling to incur time and expense in dealing with property directly. Furthermore, lenders tend to want to avoid the potential liabilities that can arise from being a mortgagee in possession.

When enforcing rights under a specific security document, lenders must bear in mind that the Insolvency Act 1986 (“IA 1986”) imposes a moratorium which prevents creditors from enforcing its security when a company has made an application to enter administration or once a company has gone into administration. This statutory moratorium provides breathing space for companies in financial difficulties in order to see if a strategy can be followed to allow the company to go through and hopefully exit the administration process.

Powers of Sale

Sections 101 and 103 of the Law of Property Act 1925 (“LPA 1925”) give lenders a right to exercise a power of sale over a property. However, this right cannot be exercised until:

  1. The mortgage sum has become payable and a notice requiring payment has been served on the mortgagor and the sum remains unpaid 3 months’ after service of the notice.
  2. Interest under the mortgage has become due and has remained unpaid for 2 months.
  3. There has been a breach of another term of the mortgage.

It is always best for a lender to make formal demand before proceeding with any enforcement action. The demand should set out the specific sum that needs to be repaid, making sure this is not more than what the borrower actually owes. Demanding payment in excess of what the borrower owes is likely to be disputed by the borrower. It is always better to claim less than what is actually owed whilst reserving the right to claim any excess at a later date.

Any demand should be served during normal working hours. It should be addressed to the borrower and served in accordance with the notice provisions contained in the relevant security document(s). If the security document(s) are silent as to service requirements, the service provisions contained in the LPA 1925 should be referred to. It is also important to remember that a notice must be properly served on a borrower before any demand can be made of any guarantor that exists.

Where a mortgage debt is repayable on demand, the borrower must be given a reasonable time to implement a mechanism by which it can repay the debt. However, this does not mean that the lender has to allow the borrower the opportunity to try and obtain alternative funding. If there is no reasonable prospect of the borrower being able to repay the debt, it may be possible for the lender to enforce its security within hours. This will depend on the financial position of the borrower and any recent discussions that have taken place between the lender and borrower.

A lender has the right to sell the property free from the borrower’s interest. This power arises either from the statutory right contained in the LPA 1925 or under an express power of sale contained in the mortgage document. When exercising its power of sale, the lender has the following duties to the borrower:-

  1. To act in good faith (although this does not mean the lender has a fiduciary duty to the borrower).
  2. To take reasonable care to obtain a proper price. The lender will need to consider whether vacant possession can be obtained, the status of any planning permission(s), the extent, content and timing of the sale advertisement and the sale of goodwill. In practice, lenders should obtain at least two valuations from independent valuers.

However, the lender is not obliged to postpone the sale of the property in the hope of obtaining a better price. Furthermore, the lender does not have to improve the condition of the property prior to any sale.

A lender cannot sell to itself unless this is approved by the court. This is known as the “self-dealing rule”. This also applies to any officer of the lender. The sale of the property to a group company is permitted as long as the lender has taken sufficient steps to demonstrate that a proper price has been obtained. This is known as the “fair-dealing rule”.

Once the property has been sold, the funds need to be paid out in the following order:

  1. Discharging any prior encumbrances if the property is sold free of them.
  2. Payment of costs, charges and expenses on sale.
  3. Discharge of money due under the mortgage.

The balance is paid to the next successive lender if there is one; otherwise it is paid to the borrower.

Mortgagee in possession

In the case of residential properties, taking possession is usually the first step when selling residential property. This will require a court order. In the case of tenanted commercial property, taking possession amounts to stepping into the shoes of the borrower and tenants must be told to make future instalments of rent to the lender rather than the borrower.

In the case of commercial property, under the LPA 1925, a lender has a right to possession of the property without notice or demand and usually without a court order. Where there is no court order, “possession” does not require physical occupation of the land but does require the lender to have taken over management of the property. However, a lender will usually appoint a receiver to avoid any possible liability as a mortgagee in possession. Such liabilities could include:

  1. Accounting for any rent received.
  2. Attempting to lease the property at full open market rent.
  3. Paying full rent for the property if its occupation extends beyond a reasonable time for sale.
  4. Complying with lease covenants.
  5. Taking reasonable care of the property.

Appointment of receivers

This is the most common method of enforcement used by lenders. Receivers can be appointed to collect rent, manage and dispose of commercial property. These receivers are often known as LPA receivers as they are appointed using the statutory powers granted by the LPA 1925.

Any receiver appointed can only deal with and dispose of the property charged under the security documents. Receivers do not have wide ranging powers to manage the company. Such powers are only granted to administrators or administrative receivers.

The statutory powers granted to receivers are very limited. They have the power to receive rents and income and insure the property upon the lender’s direction. As a result, LPA receivers’ powers are normally extended in the security document. The most important of which is usually a power of sale which essentially gives an LPA receiver virtually the same rights as a mortgagee in possession. This does however mean that LPA receivers are subject to the same obligations.

In most cases, an LPA receiver is the agent of the borrower. However, despite this agency relationship, the receiver owes its primary duty to the lender as mortgagee to enforce the security and account for the sale proceeds. As such, a receiver will often require a lender to provide an indemnity, although this would not cover any negligence on the part of the receiver.

The receiver’s appointment is terminated when the company goes into liquidation. However, this will not affect the receiver’s power to hold or dispose of the charged property. LPA receivers may be asked to step down upon the appointment of an administrator.

Any receiver appointed has to apply money received in the following order:

  1. In discharge of all rent, taxes, rates and outgoings;
  2. In keeping down annual sums or other payments that take priority over the lender’s mortgage;
  3. In payment of his commission, insurance premiums and the cost of carrying out repairs; and
  4. Interest due under the mortgage.


To obtain an order for foreclosure, a lender must apply to the court. Foreclosure transfers the charged property to the lender and destroys the underlying debt. The lender is then able to sell the property free from any of the borrower’s rights.

Foreclosure is a discretionary remedy and it is only ordered by the court if the outstanding loan exceeds the value of the property. If the loan does not exceed the value of the property, the court will usually order the sale of the property.

Foreclosure is rarely used in practice because:

  1. As the underlying debt is extinguished, the lender may not subsequently sue the borrower if there is a shortfall;
  2. Foreclosure requires a two-stage process giving the borrower time to pay the outstanding amounts after the first stage; and
  3. The lender’s statutory and express powers of sale allow the lender to sell the property fee of the borrower’s rights in the property anyway.

Our expert property litigation solicitors are experienced in representing both lenders and borrowers in relation to enforcement of security. Please do not hesitate to contact a member of the team to discuss this topic.

Mortgage Disputes

A mortgage is the transfer of ownership of an asset by way of security for particular obligations, on the express or implied condition that it will be re-transferred on the discharge of the secured obligations.

For ease of reference, we will refer to the holder of a mortgage as the “mortgagee”, and the other party as the “mortgagor”.

There are two types of mortgage:

  1. Legal. This transfers legal title to the mortgagee, and prevents the mortgagor from dealing with the mortgaged asset while it is subject to the mortgage. This is the most secure and comprehensive form of security interest.
  2. Equitable. An equitable mortgage transfers a beneficial interest in an asset to the mortgagee with legal title remaining with the mortgagor.

There are various methods of enforcement available to a mortgagee.


Foreclosure is a remedy available to the holder of a legal or equitable mortgage. It is the process by which the mortgagor’s rights in the secured asset are extinguished.

Foreclosure is one of the oldest powers of enforcement, and is rarely used in practice. The process can be time consuming and expensive, and there are often better methods of enforcement available.

Taking possession

Broadly speaking, holders of both a legal and equitable charge have the right to take possession of the mortgaged property. The right to take possession arises without the need for the secured debt to be payable (unless the mortgage document expressly excludes this), and a court order is not necessary.

Although it may seem an attractive method of enforcement, given the ability to exercise at any time, without a court order; a mortgagee should exercise caution as there are a number of complicating factors. For example, a mortgagee in possession may take on liabilities of the mortgagor, such as liability for environmental damage. Also, the mortgagee in possession has a duty to account for any income and profit received.

As a result of this, taking possession is rarely used, and more commonly, a receiver or administrator is appointed.

Power of sale

A power of sale is available if there is an express power in the security document, or if a mortgage is made by deed (and, in the case of an equitable mortgage, expressed to be made by way of legal mortgage).

When the power of sale arises will usually depend upon the terms of the security document.

There are a number of duties imposed upon a mortgagee when exercising a power of sale, including the duty to take reasonable steps to obtain a proper price for the asset, and to act fairly towards the borrower.

When there is a surplus from the proceeds of sale, the mortgagee will hold the proceeds on trust to be applied in the following order:

  1. Discharging prior ranking encumbrances.
  2. Paying expenses of the sale.
  3. Discharging secured liabilities.

Any surplus will be paid either to any other security holder, or to the borrower in the event there are no other secured liabilities.

Appointing a receiver

The receiver may be appointed as a way of enforcing the security. The receiver will take charge of the assets, to realise them (usually by sale) and use the proceeds to discharge the secured liabilities.

This is a complex area of law, and a mortgagee should take legal advice before enforcing a mortgage. Similarly, if faced with enforcement action, a mortgagor should seek independent advice.

How We Can Help

A member of our specialist team will be happy to help.

To discuss Insolvency Property Issues issues, please either use the contact form on the right, email us at or call us today on +44(0)161 941 4000 to speak to a member of our team.

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