Commercial Tenant Insolvency UK — What Landlords Can Do When a Tenant Goes Bust

Administration — The Moratorium and Its Impact on Landlords

When a company enters administration under IA 1986 Schedule B1, an automatic moratorium comes into effect that restricts what the landlord can do: (a) Forfeiture blocked: the landlord cannot forfeit the lease (by re-entry or court order) during the administration moratorium without the consent of the administrator or the permission of the court (IA 1986 Sch.B1 para.43(4)); the court will give permission only where it is satisfied that the administration purpose would not be prejudiced; this is a high bar and courts are reluctant to allow forfeiture where the property is potentially valuable to the administration; (b) CRAR blocked: Commercial Rent Arrears Recovery (CRAR — the statutory distress replacement under TCEA 2007 Part 3) cannot be used during the moratorium without the administrator's consent or court permission (IA 1986 Sch.B1 para.43(2)); the taking of control of goods and sale procedure is entirely unavailable; (c) Court proceedings for debt recovery: the landlord cannot begin or continue proceedings to recover the rent debt (as a liquidated sum) without the administrator's consent or court permission during the moratorium; outstanding arrears that accrued before the administration date are an unsecured pre-appointment claim in the administration; (d) Rent accruing during administration (super-priority rent): the administrator who causes the company to use the demised premises is effectively a new occupier entitled to occupy the property — the administrator is personally required to pay the rent falling due after the administration appointment as an administration expense (an expense of the administration payable ahead of the administrator's own fees) — known as 'super-priority' or 'expense rent'; the position is established by the cases Lundy Granite (1871) and Re Toshoku Finance UK plc [2002] UKHL 6; since 2020, the Insolvency (England and Wales) Rules 2016 r.3.51 confirms that rent falling due after administration is an administration expense if the administrator uses the property; (e) Landlord's options: the landlord should (i) write to the administrator immediately to confirm whether the company will continue to use the property; (ii) serve a notice on the administrator requiring them to elect within a reasonable time whether to adopt the lease (making rent super-priority) or to disclaim; (iii) negotiate for the administrator to pay the current rent as an administration expense in exchange for allowing the administration to use the property; (iv) consider applying to the court for permission to forfeit where the administrator is not paying rent and the property is being wasted.

• Administration moratorium (IA 1986 Sch.B1 para.43): forfeiture, CRAR, and court proceedings for debt recovery are all blocked during administration without the administrator's consent or court permission
• Super-priority rent (expense rent): where the administrator uses the demised premises after the administration appointment, the rent accruing from that date is an administration expense payable ahead of the administrator's fees — this applies even where the company is insolvent; based on Re Toshoku Finance UK plc [2002] UKHL 6
• Pre-appointment arrears: rent arrears accruing before the administration date are unsecured pre-appointment claims; the landlord will typically recover only a fraction in the administration (the dividend declared to unsecured creditors); guarantor claims remain unaffected
• Landlord's first steps in administration: write immediately to the administrator demanding confirmation of occupation status; request the administrator elect to adopt or disclaim the lease; negotiate payment of current rent as an expense; take legal advice on whether to apply to court for permission to forfeit
• Disclaimer by administrator: the administrator can apply to disclaim the lease as onerous property (IA 1986 s.178); disclaimer ends the lease and eliminates the obligation to pay rent going forward; the landlord loses the income stream but regains vacant possession to re-let

Company Voluntary Arrangement (CVA) — Landlord Cramdown Risk

A CVA (IA 1986 Part I) is a formal compromise between a company and its creditors — supervised by a licensed insolvency practitioner — to repay debts over time or at a reduced amount. CVAs have been widely used by retail and hospitality companies to restructure their lease portfolios by reducing rents and closing unprofitable sites. Key consequences for landlords: (a) Voting: at the creditors' meeting, the CVA proposal is approved if 75% by value of creditors who vote approve it (IA 1986 s.4A); landlords are generally unsecured creditors and their votes are counted by value of their claim (typically the rent arrears plus future rent liability for the unexpired lease term discounted); a 75% majority approval binds ALL unsecured creditors, including landlords who voted against; (b) CVA cramdown of landlords: the CVA can propose to reduce future rents, cap arrears recoveries, or close sites (by terminating leases early in exchange for a fixed compensation payment that is less than the full rent liability); this is the 'cramdown' mechanism that has been widely used by major retail and hospitality insolvencies (BHS, Debenhams, Byron Burger, Pizza Express, etc.); (c) Challenge by landlords: a landlord who voted against the CVA can challenge it in court within 28 days of the meeting on grounds of: (i) material irregularity in the procedure; or (ii) unfair prejudice to the landlord as a creditor (IA 1986 s.6); a CVA has been successfully challenged where landlord creditors are treated materially worse than other unsecured creditors without justification (Lazari Properties 2 Ltd v New Look Retailers Ltd [2021]); (d) Moratorium during CVA: an optional pre-CVA moratorium is available for eligible companies (IA 1986 Sch.A1); the moratorium blocks enforcement action including forfeiture and CRAR for a period of up to 40 days (extendable); (e) Guarantors in CVA: the CVA does not automatically release guarantors; guarantors of the tenant company's obligations under the lease retain their liability as if the CVA had not occurred — unless the CVA explicitly releases them (which creditors may resist); challenging the CVA does not automatically reinstate guarantor liability in full; guarantor claims should be reserved and enforced separately.

• CVA approval threshold (IA 1986 s.4A): approved by 75% by value of creditors who vote; a landlord who votes against is still bound if the CVA is approved — the 'cramdown' mechanism
• Retail and hospitality CVA precedents: major insolvencies (BHS, Debenhams, Byron Burger, New Look) used CVAs to reduce landlord rents and close unprofitable sites; landlords were treated as a class of creditor whose rents were reduced or eliminated on affected sites
• Challenge ground: unfair prejudice (IA 1986 s.6): landlords can challenge within 28 days of the CVA meeting; the Lazari Properties v New Look [2021] case established that treating landlord creditors materially worse than other unsecured creditors without commercial justification can constitute unfair prejudice
• Guarantors not automatically released by CVA: guarantors of the tenant's lease obligations retain their liability even after a CVA reduces the principal obligation — the CVA does not automatically release surety obligations; landlords should pursue guarantors for the shortfall
• Forfeiture in CVA: during a CVA moratorium (IA 1986 Sch.A1) forfeiture and CRAR are blocked; outside the moratorium (most CVAs do not involve a formal moratorium), the landlord can forfeit for breach of the CVA obligations or pre-CVA breaches, subject to the court's discretion

Liquidation — Disclaimer and the Landlord's Position

When a company enters compulsory liquidation (winding up by the court) or creditors' voluntary liquidation, the liquidator takes control of the company's assets and distributes them to creditors in the statutory order of priority. Leases are a contingent liability rather than an asset (unless the property is sub-let above the head rent). Key points for landlords: (a) Disclaimer of lease (IA 1986 s.178): the liquidator can disclaim any onerous property — including a lease — by giving notice to interested parties; disclaimer releases the company from all obligations under the lease, including the obligation to pay rent; disclaimer brings the lease to an end; the landlord loses the income stream and regains vacant possession; the landlord can prove for damages in the liquidation as an unsecured creditor (typically recovering a small fraction of the arrears and future rent liability); (b) Effect of disclaimer: the disclaimer brings the leasehold estate to an end — it vests neither in the liquidator nor in the landlord until the landlord makes a vesting order application; the landlord must apply to the court for a vesting order (under IA 1986 s.181) to have the property vested in a person specified by the court (typically the landlord); once the vesting order is made, the landlord can re-let the property; (c) Claiming in the liquidation: the landlord proves as an unsecured creditor for: (i) outstanding rent arrears at the date of the winding-up order; (ii) the present value of future rent liability (mesne profits) discounted to a lump sum; the landlord's claim competes with all other unsecured creditors; in practice, commercial landlords rarely recover more than 10-20p in the pound in liquidation; (d) Guarantors in liquidation: a guarantor of the tenant's lease obligations remains fully liable in liquidation — the guarantor's liability is not affected by the company's insolvency; the landlord should pursue the guarantor separately; (e) Commercial Rent (Coronavirus Act) 2022: the CRA 2022 pandemic rent arbitration scheme applied to ring-fenced rent debt accrued during the pandemic period (March 2020 to June 2021 for most sectors); landlords and tenants could apply to a statutory arbitration scheme; the CRA 2022 arbitration scheme closed to new applications in September 2022 but awards remain in force.

• Disclaimer by liquidator (IA 1986 s.178): the liquidator can disclaim the lease as onerous property; disclaimer ends all lease obligations for the company; the landlord regains vacant possession but loses the debt — they can only prove as an unsecured creditor for arrears and the net present value of future rent
• Vesting order (IA 1986 s.181): after disclaimer, the landlord must apply to the court for a vesting order to have the property formally vested in them (or another person); without a vesting order, the property is in legal limbo after disclaimer — the landlord cannot re-let it without obtaining the order
• Dividend to unsecured creditors: commercial landlords typically recover 5-20p in the pound in liquidation; the unsecured estate is shared between all unsecured creditors; HMRC preferential and secondary preferential claims rank ahead of unsecured creditors from December 2020
• Guarantors survive liquidation: the liquidation of the tenant company does not release the guarantor; the guarantor remains fully liable for all lease obligations; the landlord should simultaneously demand payment from the guarantor and prove in the liquidation
• CRAR in liquidation: once a winding-up order is made, CRAR cannot be used; the landlord should use CRAR before the winding-up order (if possible) to take control of goods — a completed CRAR (goods already taken into control) is effective even if the winding-up order is subsequently made

Enforcing Against Guarantors and Practical Landlord Steps

Guarantors are the landlord's most valuable protection in a commercial tenant insolvency. A personal or corporate guarantee of the tenant's obligations under the lease means the guarantor remains liable for all the tenant's obligations — including the rent arrears and, where the lease was granted before 1 January 1996 (old regime — LTA 1988 privity of contract), the original tenant also remains liable. Key points on guarantors: (a) The guarantee is an independent obligation: the guarantor is liable regardless of the tenant company's insolvency — the landlord does not need to prove in the insolvency first; the landlord can simultaneously pursue the guarantor for the full debt and prove as an unsecured creditor in the insolvency; (b) Types of guarantee: a 'see to it' guarantee requires the guarantor to ensure the tenant performs its obligations — the guarantor is liable as soon as the tenant defaults; an 'on-demand' guarantee requires the landlord to make a formal demand on the guarantor before the guarantee is triggered — check the guarantee wording; the s.17 LTCA 1995 notice requirement applies where the former tenant or guarantor is liable under the old regime for a fixed charge (rent); (c) The Authorised Guarantee Agreement (AGA — LTCA 1995 s.16): on the assignment of a commercial lease (post-January 1996 LTCA 1995 regime), the outgoing tenant may be required as a condition of consent to enter an AGA guaranteeing the assignee's performance; the AGA liability is limited to the period of the assignee's ownership — when the assignee assigns again, the AGA liability ends; the landlord should demand the s.17 LTCA 1995 notice in respect of fixed charge defaults under the AGA within 6 months of the default; (d) Practical steps for commercial landlords facing tenant insolvency: (i) Act immediately — instruct specialist insolvency and property solicitors on the first signs of tenant distress; (ii) Serve CRAR notice and take control of goods before the formal insolvency procedure begins if possible; (iii) Make formal demand on guarantors simultaneously with proof of debt in the insolvency; (iv) Secure the property — change locks only where the lease permits peaceable re-entry and you are confident the premises are legally vacant (taking legal advice); (v) Notify your buildings insurer immediately — vacant or distressed premises may invalidate the insurance; (vi) Consider subletting or assignment of the lease to a new solvent tenant as the fastest route to resumed income.

• Guarantors remain liable in insolvency: the guarantor's obligations survive the tenant's insolvency; the landlord can pursue the guarantor for the full arrears and future rent liability without first proving in the insolvency; demand payment immediately on the tenant entering any formal insolvency procedure
• Section 17 LTCA 1995 notice: for fixed charges (rent; service charge; insurance) under the old LTA 1988 regime or an AGA, the landlord must serve a s.17 notice on the former tenant or guarantor within 6 months of the default to preserve the claim; failure to serve the notice in time extinguishes the right to recover that fixed charge from the former tenant or AGA guarantor
• CRAR before insolvency: use CRAR (TCEA 2007 Part 3) to take control of the tenant's goods before the formal insolvency procedure is commenced; once administration begins the moratorium blocks CRAR; completed CRAR (control of goods already taken) survives the administration moratorium
• Insurance on vacant property: notify the buildings insurer immediately when the tenant becomes insolvent or vacates; standard landlord insurance policies often exclude or restrict cover for vacant properties after a defined period (typically 30 or 60 days); specialist vacant property cover must be arranged promptly
• Re-letting strategy: work with commercial agents to find a replacement tenant as quickly as possible — vacant commercial properties attract full business rates (after the 3-month empty property rate relief period for most properties; 6 months for industrial properties); a new solvent tenant is the fastest route to restored income

Frequently asked questions