203: What is the effect of insolvency of commercial landlords on their tenants?

As we head into another lockdown, it is not just commercial tenants that are becoming insolvent but also commercial landlords too. Intu, the owner of shopping centres such as Lakeside and The Trafford Centre, collapsed back in June 2020 and there are likely to be other landlord casualties due to the millions of pounds of rent remaining outstanding.

In this blog, we look at the answers to some common queries raised by commercial tenants when they are faced with a landlord who goes into administration or alternatively enters a company voluntary arrangement (CVA).

Landlords may be subject to other restructuring or insolvency regimes, such as receivership, liquidation or the new Restructuring Plan; although some of the principles mentioned below might apply to those too, we do not deal with them here.  Nor do we deal with situations where intermediate landlords/tenants have sublet all or part of their premises:  they will have different business priorities that will be manifested in different approaches taken by their administrators or CVA supervisors.

Does my lease continue if my landlord is in administration / CVA?

Yes almost certainly, the lease remains in place as before. When a landlord enters administration, its administrators will ultimately look to sell its freehold or reversionary interest;  in the meantime and in line with their statutory duties they will want to receive all rents and other payments due under the leases and so carry them on.  The only change is who the tenant deals with as the administrators act on behalf of the landlord.  The main consideration for any tenants will be who they may be dealing with once the landlord’s interests have been transferred. With a CVA, the position is even simpler, the landlord itself carries on as before under the guidance of the supervisor; the impact of the CVA is on the landlord’s creditors rather than its debtors.  In either case, all of the tenant’s obligations to pay rent, service charge, insurance and other payments will continue as before.

Can I surrender my lease if my landlord is in administration / CVA?

The answer is it depends on the landlord’s administrators or supervisor. It is entirely a commercial negotiation and there is no obligation for them to accept a surrender of the lease.

A tenant will need to enter into discussions to ask if it can agree to surrender its lease. Any administrators or supervisors will have investigated the landlord’s business before appointment so will be prepared for any situations where commercialities make it likely that a tenant would request a surrender.  Therefore they should deal with it as promptly as the landlord normally would. In the meantime, the rental payments must continue to be made.

If a surrender is agreed, can I simply just walk away?

Not immediately. If a surrender of the tenant’s lease is agreed by the landlord’s administrators or the supervisor guiding its directors while in CVA, this would need to be agreed in a formal deed of surrender negotiated and agreed by both parties. This deed of surrender must be completed before you can walk away.

It may also be possible for a tenant to ask for surrender ‘by way of operation of law’. As surrender by operation of law is inferred by the conduct of the parties, it is important that a tenant gets a letter from the landlord or its administrators  confirming that it accepts receipt of the keys and return of the original lease by way of surrender by operation of law.

If a tenant simply walks away from the lease without getting such a written confirmation, there is a risk that the lease remains in place and the administrators or landlord (as appropriate) can take action for payment of rents.

Can I assign or underlet my lease whilst the landlord is in administration / CVA?

In theory yes, but you will usually need to apply for formal consent from the landlord or its administrators as per normal.

Consent is usually required in a formal licence to assign or underlet which must be negotiated and agreed between the parties.