With the latest statistics suggesting personal insolvencies have increased for the fifth consecutive quarter, it’s fair to say that the British consumer economy remains shaky at best, as we embark on our brave decision to leave Europe and go it alone. Even for those businesses who themselves remain financially stable, the ramifications of increased insolvencies may be felt in other ways. One such example is when the landlord of a commercial property goes bust. We explore what this scenario might mean for a tenant’s company.
A landlord is officially insolvent
The tenant’s first understanding of the situation will likely come in the form of a letter from the appointed Insolvency Practitioner (IP) These letters generally are a courtesy to inform the tenant of what’s happening, and will likely advise him to keep on paying the rent and service contributions as normal, but paid to a new bank account.
What happens if the landlords’ company goes into liquidation?
If a landlord’s company has run into difficulty, there may come a point when creditors assess what is their best means to recoup the largest percentage of their debts. If it is deemed that breaking up the company and its assets is that solution then the property the tenant is renting is likely to make up part of the that and will be sold off.
The Leaseholders Right of First Refusal
If the liquidator has decided to try and sell the property freehold, an interesting scenario then arises known as the leaseholders’ collective Right of First Refusal (under the Landlord and Tenant Act 1987. By this law, leaseholders are offered the chance to buy the property first as a means of minimising the fallout of the landlord’s situation on a tenant’s own affairs. So if a tenant’s company is in the position to do this, buy the property, this may well be something to consider.
Disclaiming the Freehold
If the company liquidator decides to disclaim the freehold, this essentially removes them from all responsibility or liability in respect of it. This situation is likely to occur if the property has no value, for example, or a value which cannot be easily realised. In this situation, the property will revert to the Crown, under the ancient principle of “Bona Vacantia” (meaning literally ‘good vacancy’).
What will it mean for a tenant’s company if the liquidator disclaims?
In this scenario a tenant will continue as a tenant against the Crown under exactly the same terms and duration set out in the original lease. The same would go for any subtenant, should there be one in place.
If the landlord has gone bust who arranges the maintenance?
One final point to consider concerns ongoing property maintenance requirements during the sometimes protracted insolvency proceedings leading to liquidation or indeed if the building has passed to the Crown.
Under Section 24 of the Landlord and Tenant Act 1987, there’s a clause which provides any leaseholder in a building, where its freeholder has ceased to exist, the legal right to apply to the First-tier Tribunal (FTT) for the formal appointment of a manager and receiver.
It’s always a tenant retain proper legal advice in such a situation because the process can be convoluted but, in principle, the process allows for you to propose the appointment of an experienced property professional to the role.
If the proposed expert has the relevant experience, qualifications and insurance, the FTT is likely to accept the nomination and appoint the manager put forward. This will give the leaseholder peace of mind, knowing the rental premises are being properly maintained.