Formal insolvency proceedings

Advising a receiver/insolvency practitioner or a mortgagee

The client is likely to be looking at a short-term solution to a problem, so the practitioner will have to adjust their mindset and advice to reflect this in comparison with, for example, a client wishing to improve a property for longer-term investment. The practitioner is likely to be called on to provide relatively speedy advice, such as:

• how readily an asset can be realised in the market, on a forced basis, and the likely marketing period
• how enforcement can best be structured (for example by receivership or administration) to ensure realisation with minimal third-party dispute – particularly in a landlord and tenant context, or
• if the asset held is a head lease, whether the borrower has been complying with contractual obligations and if not, how this can be rectified.

In many situations where the asset is a long head-leasehold interest and the head leaseholder is in LPA receivership, there may be an opportunity for the freeholder to attempt to improve their position by taking action for forfeiture. There is no legal bar on a freeholder taking this step in such circumstances – in contrast to the position on administration, where there is a statutory moratorium on any action for distress, forfeiture or suing for arrears without the consent of the company in administration or leave of the court.

Any right to forfeit a valuable head lease will depend on the terms of the head lease and, in part, whether insolvency is a ground for forfeiture. In all probability the head leaseholder would have had cashflow difficulties for some time and so there could be other potential breaches of tenant covenants – for example, issues relating to disrepair, or non-payment of ground rent or service charge. It is important when acting for a mortgagee to protect against the risk of the head lease asset being lost.

In circumstances where the insolvent company's interest is in a lease, or leases, reserving a market rent, the insolvency practitioner or mortgagee will want to assess – often by reference to professional advice – the relative importance of the property interests to the company's business. Where leases are not operationally important, an insolvency practitioner will normally seek to surrender any leases for nil value, or (although less desirable as it theoretically leaves liabilities outstanding) consent to forfeiture. Where leases are important, the insolvency practitioner will seek to preserve and realise them, often using the protection of the statutory moratorium in administration highlighted in Types of insolvency process.

Advising a landlord

A practitioner may be asked to advise a landlord where a tenant is in financial difficulties or where the tenant is subject to insolvency proceedings. The practitioner could, for example, be managing a property where the tenant is starting to have difficulty in meeting rental payments.

In all cases, and subject to the provisions of the Commercial Rent (Coronavirus) Act 2022, should the tenant enter into formal insolvency proceedings (administration, bankruptcy, liquidation, etc.), any debts owed to the landlord, whether for rent, service charge or interest, would often be unsecured and the landlord would join the list of other unsecured creditors. In certain circumstances, a landlord may have some advantage, such as when a rental deposit has been taken or there is a guarantor, or a past tenant, who remains liable under the lease and can be pursued for arrears. These alternate avenues should always be explored by a practitioner in such circumstances.

The case law in relation to the classification of a landlord's entitlement to the payment of rent for a period accruing during an administration or liquidation has been developing over the last few years. The point at issue is whether rent ranks purely as an unsecured claim in an administration/liquidation (where realisation of the debt may be very limited), or as an expense of the administration (where rent is paid as a priority over unsecured claims and is likely to be received in full).

There were also disputes in relation to the apportionment of rent, particularly where an administration commenced the day following a quarterly rent payment date, and the administrators sought to classify the rental for the whole of that quarter as an unsecured claim, even where they were using the premises for the purpose of the administration during that period.

The Court of Appeal (Pillar Denton Ltd and others v Jervis and others [2014 EWCA Civ 180]) has now determined that the office holder must make payments at the rate of the rent for the duration of any period during which the office holder retains possession of the demised property for the benefit of the winding up or administration. The rent will be treated as accruing from day to day, and those payments are payable as expenses of the winding up or administration. 

Enforcement during insolvency process

If a tenant is in a formal insolvency process, the action that can be taken by a landlord or the landlord's agent will vary depending on the nature of the insolvency proceedings.

Company voluntary arrangement: In a company voluntary arrangement, no consent of the court is required to seize goods or to commence forfeiture proceedings before the arrangement takes effect, unless the company is in a moratorium (or historically the company had applied for a Part A1 moratorium). Following the making of the voluntary arrangement, those rights are available subject to the terms of the voluntary arrangement.

Individual voluntary arrangement: In an individual voluntary arrangement, the debtor may apply to court for an 'interim order' prior to presenting the proposal to creditors. The mere fact that an application for an interim order has been made, or that an interim order has been granted, means the consent of the court is required for a landlord to be able to seize goods or to commence forfeiture proceedings. Following the making of the voluntary arrangement, those rights are available, subject to the terms of the voluntary arrangement.

Administration: During the administration process, according to the statutory moratorium described in Types of insolvency process, no creditor of the company is able to seize goods, sue for arrears of rent or commence forfeiture proceedings (including by way of peaceable re-entry) without the consent of the administrators or leave of the court.

LPA receivership: With receivership, all usual property law remedies against the company are permitted.

Liquidation: During the liquidation process, only a liquidator has the power to disclaim a lease and will generally do so if they consider that the lease is a liability and therefore cannot be sold in order to realise capital. This is often the case, because where a liquidation follows an administration, which is relatively common, any assets of value will generally have been realised during the administration period.

It is possible to force a liquidator to make a decision on this issue. In the event of disclaimer, legal advice should be sought as to remedies against guarantors, assignors, etc. In the event of disclaimer, the position of any subtenant becomes rather difficult. The subtenant, if they wish to remain at the property, is likely to be required to apply to court to vest the disclaimed lease in itself. In the absence of such an application, the landlord would have the right to terminate for a breach of the terms of the now disclaimed head lease. 

Moratorium: During the moratorium process, a landlord cannot exercise a right of forfeiture, enforce security or institute or continue any legal proceedings (including issuing a winding-up petition) without the permission of the court. A landlord may only do so in respect of rent payments during the moratorium. Unlike in an administration, a landlord cannot apply for permission to forfeit in relation to pre-moratorium debts for which the company has a 'payment holiday' (including pre-moratorium rent).

Scheme of arrangement/restructuring plan: Schemes of arrangement and the new restructuring plan are available for tenants needing to compromise landlord liabilities. Landlords should note that their rents could be ‘crammed down’ as a creditor class, with a restructuring plan approved without their consent.