Commercial tenant goes out of business

What are your rights when a commercial tenant goes bust?

In challenging economic conditions, commercial property landlords must be prepared for tenants to hit financial difficulties and for some to go out of business.  If your tenant becomes insolvent, there are legal restrictions on the kind of action you can take which will be different depending on the type of insolvency process your tenant is in.  An expert lawyer can guide you through this complex area, allowing you to focus on getting your income stream back on track.

‘If your commercial tenant has gone bust, your top priority is to get the property back and secure a new tenant as soon as possible,’ says  Kimat Singh, head of the commercial property team with Kerseys Solicitors. ‘Unfortunately, it is not as simple as just going in to clear out the unit and change the locks.’

First step – contact your solicitor

You should contact your solicitor as soon as you become aware that your tenant is in any sort of financial difficulty.  This is because some insolvency processes make it more difficult or even impossible for you to forfeit the lease and get back in control of the property.  Acting quickly may allow you to avoid those obstacles.  Your solicitor will be able to assess what is likely to happen with your tenant and explain your options.

Types of insolvency process

An insolvency process will involve a formal procedure set down by law, overseen by a professional insolvency practitioner.  The specific type of insolvency process (and the name given to the insolvency practitioner) will depend on whether your tenant is an individual or a company, and the tenant’s long term economic prospects.

For individuals, the options are bankruptcy or an individual voluntary arrangement (IVA), which aims to avoid bankruptcy by reaching a settlement with all the individual’s creditors.

For companies, insolvency processes fall into two main categories. Company voluntary arrangements (CVAs), restructuring, and administration, which aim to rescue the company and preserve it in some form.  In contrast, winding up and liquidation will end in the company being dissolved, with assets used to pay off creditors to the extent possible.  Receivership falls between the two, because the aim is simply to realise security which has been given for a loan or debt to settle that specific liability.

Your solicitor will need to understand as soon as possible which process you are looking at, because it will make a difference to the tactics you adopt in dealing with your tenant and getting the property back for you to relet.

Getting the property back

Before you can relet the property, the existing lease will have to be terminated.  There are three ways this can happen where the tenant is insolvent.

• Forfeiture – you may be able to forfeit the lease. Forfeiture is sometimes done by court process and sometimes by re-entering the property – that is, going in and changing the locks.  Whichever route you take, the tenant usually has a right to apply for the forfeiture to be set aside (known as relief), which means there is a period of uncertainty before you can relet.  The other issue where the tenant is insolvent is that you may need permission from the court if your tenant is in a process aimed at a rescue.  Applying for permission will take time and if it is refused, you will not be able to take action to forfeit.
• Disclaimer – an individual tenant’s trustee in bankruptcy and a corporate tenant’s liquidator both have the right to disclaim the lease. This means that the tenant will be released from all its liabilities.  Your solicitor can serve notice on them, giving them 28 days in which to decide whether or not to disclaim.  If they choose not to, they lose the right.  Either way, you will have certainty about what is going to happen.  If the lease is disclaimed, you can still pursue the insolvent tenant’s guarantor and any former tenants who remain liable.  There are some formal time limits for doing this and our solicitors will be able to advise you.
• Surrender – you may be able to negotiate with the tenant or its insolvency practitioner for the lease to be surrendered. This may work well for both you and the tenant in a range of situations, because it allows the tenant to bring their liabilities to an end and for you to get the property back without the need for court permission.  You may also have some scope to negotiate payment of some arrears or a dilapidations settlement, especially if the tenant has a guarantor.

If your tenant is involved in a CVA or an IVA, you could end up being forced to accept a change to the terms of the lease, possibly to reduce the rent or impose a break right, even if you did not vote to accept them as part of the formal process.  This is another reason why your solicitor may advise you that an early negotiation with the tenant’s insolvency practitioner, possibly leading to an agreed surrender, could be your best course of action.

Clearing the property

Where a tenant stops trading and abandons the property, you may find they have left things in the property.  Insolvency practitioners should deal with the majority of the insolvent tenant’s assets, because they should be converted to cash to settle debts.  If you are left with unremoved items you cannot simply throw them out or sell them, so you should take advice from your solicitor about what you can do.

Most commercial leases will have a clause covering this situation, which may require you to serve notice giving the tenant a period during which to remove their items before you can dispose of them.

If the lease is silent, the best approach is to make a reasonable effort to contact the tenant and give them a reasonable time to reclaim their property before you sell or dump it.  If you are negotiating a surrender, your solicitor will make sure removal of all the tenant’s property is part of the settlement.

How we can help

Our expert commercial property lawyers will explain your options and help you establish a constructive dialogue with your tenant and their insolvency team.  For further information, at Kerseys Solicitors in Ipswich on 01473 213311 or Kerseys Solicitors in Colchester on 01206 584584 or email us at [email protected].