As COVID-19 continues to disrupt economic activity, some landlords will be eyeing the financial fortunes of their commercial tenants with concern. Level 5 restrictions continue to particularly affect the retail and hospitality sectors, significantly impacting the cash flow of businesses. Landlords will be eager to know their position in circumstances where, because of the continuing impact of the pandemic, a tenant company becomes insolvent, a receiver is appointed, or enters into examinership.
When an application is brought to appoint a liquidator over an insolvent tenant company, the Court will likely vest the property of the company, including any commercial leases, in the liquidator with a view to facilitating the orderly wind up of the company. Arrears of rent and service charges accrued prior to the appointment of the liquidator will generally be treated as unsecured debt, with the result that the landlord is unlikely to recover these payments. Should a liquidator continue to occupy the premises once appointed, rent after that date may be treated as a liquidation expense and therefore enjoy priority over other creditors which position can subsist until such time as the lease is either assigned, surrendered, forfeit, or disclaimed.
The lease will generally allow an assignment of the remainder of the term of the lease to a third party with the consent of the landlord. The landlord is not entitled to unreasonably withhold consent. This may be the best outcome for a landlord, who will receive rent and service charges from the new tenant where the premises will continue to be occupied.
The liquidator may also seek to surrender the lease back to the landlord which is generally the least expensive means of handing back the premises. A landlord should carefully consider any such proposal brought by a liquidator as an opportunity to negotiate recovery of arrears of rent or service charge.
Generally provided the liquidator continues to discharge rent and complies with its obligations under the lease, a landlord cannot invoke any forfeiture provisions due to the appointment of a liquidator within the first 12 months of liquidation. The landlord continues to have the right to invoke forfeiture due to non-payment of rent although the liquidator can apply to Court for relief against such forfeiture.
Where a surrender cannot be agreed with the landlord, a liquidator can seek leave of the court to disclaim the lease. The liquidator will have 12 months within which to bring this application and if successful, the landlord may be entitled to claim for damages for loss of rent. As a landlord can be left uncertain of their position during this period, it is open to a landlord to serve notice on the liquidator requiring their confirmation within 28 days if they intend bringing such an application.
Commonly commercial leases contain provisions that on the appointment of a receiver the landlords right to forfeit the lease is triggered such that the landlord is entitled to renter the premises and terminate the lease. The benefit to the landlord in doing so is to take back possession to relet the premises. Generally, any claim for rent would be difficult to recover in a receivership situation as the funds realised would be for the credit of the bank or lender who held security over the tenant’s interest in the property.
Tenant companies may seek the protection of the Court through the appointment of an examiner. If granted, a company will enjoy protection from their creditors while a scheme of arrangement is considered. Landlords will not be permitted to enforce the terms of the lease during this period without the consent of the Court however the rent, service charges and lease covenants cannot be altered by the scheme of arrangement without the consent of the landlord. An application may be made by the landlord to have rent and service charges made an expense of the examinership thereby giving them preferential status although this preferential status will only apply in circumstances where the examiner intends to continue with the lease. Alternatively, the examiner may seek to surrender the lease.
The tenant company may also apply to Court to repudiate certain contracts, including leases. Any damages suffered to the landlord such as loss of rent for the unexpired term and the benefit of other clauses including dilapidations, will be dealt with in the examinership as an unsecured judgment debt, likely to be written down in the scheme of arrangement. In addition, the examiner can apply to Court to disclaim an onerous lease.
Summary Rescue Process
New proposals by the Company Law Review Group (the “CLRG”) on the restructuring of small companies, called the Summary Rescue Process, will be eagerly anticipated by both struggling SME’s and their landlords. The CLRG proposed a mechanism similar to the examinership process, though without the cost and expense of making such an application to the High Court. Similar to the examinership process, it is envisaged a compromise would be reached with the creditors of the company.
Of note to landlords is the question posed by the CLRG whether onerous contracts, including leases, could be repudiated as part of this process by application to the Court. The group failed to reach a consensus and deferred to the Department of Business, Enterprise and Innovation for consideration of the matter. If such a proposal were adopted, we could see a large number of companies availing of this procedure post COVID, having a significant impact on landlords.
In the current climate, landlords should carefully consider approaches by tenants for deferrals of rents. There is a delicate balance to be managed here and the possibility of not recovering rent and service charges should be weighed against the commercial realities of reletting a property during this pandemic, together with the burden on landlords of maintaining a vacant property. Landlords and tenants also should be aware of the Code of Conduct between Landlords and Tenants for Commercial Rents which is a structured approach to facilitate engagement between landlords and tenants impacted by COVID-19, the details of which have been set out in a previous article on the matter.
For further information on any of the issues above, please contact Aisling Barry firstname.lastname@example.org from the Property team at Hayes.Back to Full News
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About the Author
Aisling Barry is a Solicitor in the Property team at Hayes Solicitors. She advises on a wide range of property matters including the acquisition and sale of both commercial and residential premises. Prior to joining Hayes, Aisling trained in a highly regarded commercial firm and qualified in 2019.