A landlord’s guide to tenant insolvency

If you lease out a property to a business that has fallen into financial difficulty, you’ll both need to consider several options going forward. How you proceed will depend on what stage the company is at, however if you’re owed money, it’s wise to regularly stay in touch. Ask for updates on their progress if things take a turn for the worse - if the relationship breaks down, this will only cause extra grief and stress.

As this is often an uncertain time, it’s comforting to know that companies must act to maximise your interests as soon as they become insolvent. If they fail to do this and debt builds up, you can take legal action in the form of CCJs, statutory demands or as a last resort, a winding up petition. For the latter, you must be owed more than £750 in an undisputed case. If you are unsure where to begin, refer to the Commercial Rent Arrears Recovery (CRAR) process for more information on how to claim back rent. 

Options for an insolvent company:

Time to Pay deal – an informal agreement whereby the company pays back debt over a short time period of up to a year.

Company Voluntary Arrangement (CVA) – a formal deal between the company and creditors (i.e. a landlord) whereby the company pays back debt over three to five years. The business has an opportunity to restructure in order to find a way forward, for example negotiating rent leases. A CVA can only go ahead if over 75% of creditors (by value) approve the proposal. Creditors can expect to get between 40-100% of debt back.

Pre-pack administration – the company is bought by the directors or a third party upon the appointment of administrators to ensure a quick and efficient process. While the company may have come to an end, the business and its assets can continue. As a landlord is an unsecured creditor (see priority of creditors below), it is unlikely any rent arrears will be paid. However, if the company wants to stay on the premises there would be rent payment going forward.

Trading administration – the company is bought out of administration by another company or group after being advertised and marketed. Again, unsecured creditors may not get anything back.

Creditors Voluntary Liquidation – the business and assets are sold and turned into cash for creditors. Only creditors can appoint a liquidator for the company, not the directors or shareholders (although directors can instigate plans to members and creditors). Creditors may get something back but usually no more than 10p in the pound.

Compulsory liquidation – An Official Receiver is appointed by the Court to liquidate a company. It’s almost certain that landlords will receive nothing.

You should be contacted by an Insolvency Practitioner or Official Receiver if the company enters insolvency proceedings. If you’ve heard the company is in trouble and you’ve not been contacted by an IP or OR, you can find information at Companies House.

Are directors of the company liable?

With a limited company, individuals are protected against personal liability (unless there is evidence to support they have acted fraudulently or wrongfully). The company itself is liable to the company debt, not the director.

However, if the landlord insisted upon a personal guarantee (PG) at the beginning of the lease, the director will be personally liable for any rent arrears. 

Preference Insolvency Act

If a company is insolvent, it is not allowed to pay back more debt to one creditor than the other. It is known as a preference if a company pays debt to a landlord in order to make them ‘better off’ than the others. If there is evidence to prove this action was done on purpose, legal action will be taken against all parties involved and the director(s) may become personally liable and even disqualified. 

Priority of creditors in insolvency

A company will usually have a number of different creditors. In the event of insolvency, some will rank higher in priority than others when it comes to claiming back debt.

Secured creditors – These have a legal right or hold over the business or property including equipment, fixtures and fittings, bricks and mortar and so on and will usually be a major bank or lender. Secured creditors are at the top of the list to be paid back debt.

  • Secured creditors include fixed and floating charges. These will usually be given under a debenture (a written acknowledgement of debt). Banks with fixed or floating charges will be prioritised if a company falls into insolvency and owes money.

Preferential creditors – Employee claims are given priority over unsecured creditors.

Unsecured creditors – This includes landlords, HMRC (for PAYE and VAT), trade creditors, suppliers and some employee claims.

Shareholders – Providing capital to companies is the most risky for shareholders as they are not entitled to be paid back until all other creditors have been paid.

Are you owed rent?

If you’re in any doubt that a company you rent to is in trouble, contact them as soon as possible to find out what the problem is before jumping to any conclusions. If you wish to take action, follow the CRAR process (see above) and seek legal advice.

Anna-Lisa Searle writes for turnaround and insolvency specialist firm, KSA Group, and is a contributor to www.companyrescue.co.uk.

This information should not be interpreted as financial advice. Commercial mortgage rates are subject to change. Speak to our advisors for a mortgage illustration.