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Tenant insolvency and the impact of Brexit

Prior to the UK’s decision to leave the EU, it had been widely reported that British businesses had not undertaken full contingency planning in the event of a leave vote.

Whilst the Pound has largely recovered since its initial response to the vote, it is evident that many are still unsure of the longstanding effect the decision will have on the global economy, in a time of uncertainty and volatility.

With Brexit set to happen in the next two years or so, if you or your tenants had not already started contingency planning before the vote, you definitely ought to be now.

So, what can landlords do to reduce the risk of tenant insolvency?

In the case of a tenant experiencing financial challenges and entering insolvency as a result of the leave vote’s negative effect on the economy, landlords can undertake a series of pro-active actions to minimise the consequential losses that they will experience.

“Spring Clean” your Standard Form Leases

As a matter of good house-keeping, it is worth landlords reviewing their existing standard form leases regularly to check whether they contain adequate insolvency related protections.

A common error which occurs is leases that contain out-dated definitions of “insolvency”, “insolvent” or “insolvency event“ as there isn’t a statutory definition for any of these.  Any mention should be by reference to the statutory insolvency tests in the Insolvency Act 1986.

For example, a regular omission is for the definition of “insolvency event” to include the making of an administration order against the tenant but not accounting for the tenant entering administration via the out-of-court route introduced by the Enterprise Act 2002.  In a case like this, it may be too late for the landlord to take loss-minimising measures by the time the tenant has entered a formal insolvency process, emphasising the importance of adequate definitions on your standard form leases.

Similarly, your leases should contain appropriate tenant-side information undertakings, so that any early warning signs of financial difficulty are not missed.

What is a CVA?

  • A Company Voluntary Arrangement
  • An informal but legally binding arrangement or compromise between a company in financial difficulty and its creditors. will reduce the amount of the company’s debts so that only a proportion of the debt is owed.
  • In order to be approved, the proposal must be accepted by 75% (in value) of the company’s creditors.
  • If approved byit can prevent the company from being placed into liquidation.
  • It will bind all unsecured creditors of the company, but will not affect secured or preferential creditors, whose rights remain (unless agreed otherwise).
  • A CVA may be proposed by the directors of a company but must be implemented by a qualified insolvency practitioner, who is known as the “nominee” prior to approval and after such approval as the “supervisor”.

A CVA should clearly set out the consequences of tenants failing to comply with its terms. However, some can automatically terminate upon the tenant’s failure to comply with those terms.  CVA’s have defined events of default that provide the supervisor with the discretion to take further action if appropriate.  It is therefore important for tenants to check whether the termination provisions work for them.

How can it affect landlords?

As unsecured creditors, landlords will be bound by the terms of a CVA if it is approved by the requisite number of the company’s creditors, even if those landlords voted against its approval.

Know your rights

CVA’s are not always successful, and a number of high profile cases have supported this.  In cases where a corporate tenant cannot avoid administration or liquidation, it is important that landlords know their rights.  For example, landlords have the right to the payment of rent as an expense of the administration or liquidation for the period that the office holder retains possession of the property for the benefit of the administration or liquidation.

Points for landlords to consider

A few key points to note for a landlord faced with the prospect of one of its tenants entering into a CVA are as follows:

  • Act quickly – the period between the CVA being proposed and its approval is key
  • Review the terms of the CVA immediately
  • If you do not want to approve the CVA, consider taking action against the tenant to recover possession of the premises before the i is approved
  • If you are happy to approve the CVA, take measures to gather evidence during this period to substantiate the unascertainable element of your claim (e.g. by preparing a schedule of dilapidations).

For more information on this, or for advice on any other issue as a landlord, please contact Yvonne Thomas on 0115 9 100 235 or send her an email.

This is not legal advice. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website.

Posted on August 22, 2016

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