In the current economic climate, the stability of a commercial property lease can change overnight. As a Senior Litigation Partner at Ronald Fletcher Baker LLP, I frequently see landlords caught off guard when a reliable rent roll is suddenly threatened by a tenant’s financial distress.
When a tenant becomes insolvent, the legal framework governing your commercial lease agreement shifts from being governed by the lease to including insolvency law. Understanding your options—and acting on them before a formal moratorium is triggered— can make a big difference. This article provides an overview of some of the strategic options available to landlords navigating commercial tenant insolvency.
1. Identify the Insolvency Procedure affecting the Commercial Lease
Before taking any enforcement action, as the landlord of a commercial lease, it is important to identify exactly which procedure the tenant has entered. Each procedure has a different impact on your rights under the commercial property lease:
- Administration: This procedure can be particularly restrictive for landlords. An automatic “statutory moratorium” prevents you from taking legal action or peaceably re-entering the premises without the administrator’s consent or a court order.
- Liquidation (CVL or Compulsory): While there is no automatic moratorium in a Creditors’ Voluntary Liquidation, the liquidator has the power to “disclaim” the commercial lease, effectively ending the tenant’s liability.
- Company Voluntary Arrangements (CVAs): Often used by retail and hospitality tenants to restructure debt, a CVA can legally “cram down” your rent or change the terms of the commercial lease against your will if the majority of creditors agree.
2. Immediate Financial Recovery: Drawing on Security
If the tenant company has no cash, commercial landlords may want to look to the “wrappers” surrounding the commercial property lease. These are often the fastest route to liquidity for a landlord of a commercial lease where the tenant has entered some form of insolvency:
- Rent Deposit Deeds: Most modern commercial leases are supported by a rent deposit and depending on the circumstances it may be possible to draw down on the deposit but care must be taken and we would recommend that you seek legal advice before drawing down on the deposit. We review these deeds to ensure you can draw down funds to cover arrears immediately. Commercial landlords must also be careful to follow the specific notice requirements to avoid a technical breach.
- Guarantors: Is there a parent company or an individual director guaranteeing the commercial lease? If so, they are usually “jointly and severally” liable for the rent.
- Authorised Guarantee Agreements (AGAs): If the lease was assigned to the current tenant, the former tenant may still be liable. Under Section 17 of the Landlord and Tenant (Covenants) Act 1995, you must serve a formal notice on former tenants/guarantors within six months of the debt arising, or your right to claim against them is permanently lost.
3. Claiming Rent as an ‘Administration Expense’
A common misconception is that a tenant in administration doesn’t have to pay rent. If the administrator is using the property to trade the business or store stock for an upcoming sale, the rent for that period could be classified as an administration expense.
At Ronald Fletcher Baker, we have successfully acted on behalf of landlords to ensure this rent is paid in priority to other creditors. If the administrator is using your commercial property to add value to the insolvent estate, then we have successfully claimed the commercial property lease costs from the administrator on the basis that they must be met as a cost of the administration.
4. Sub-Tenant Direct Payment Notices
If your insolvent tenant has sub-let part or all of the premises, there is a potentially powerful statutory “bypass” option. Under the Tribunals, Courts and Enforcement Act 2007, a landlord can serve a notice on the sub-tenant requiring them to pay their rent directly to the head-landlord. This effectively diverts cash flow away from the insolvent tenant and directly into your pocket, bypassing the insolvency practitioner.
5. Negotiating a Strategic Surrender
Sometimes, the best option isn’t litigation—it’s a clean break. If an administrator or liquidator has no use for the premises, we can often negotiate a surrender of the commercial lease.
By accepting a surrender, you regain control of the asset immediately. While this ends the tenant’s future liability, it allows you to re-market the property to a solvent tenant and avoids the “limbo” period where a property sits empty but legally tied up by an insolvent company.
Proactive Management: The Key to Resilience
In my experience at RFB Legal, the landlords who fare best are those who monitor their commercial property leases for “early warning signs”—such as requests for monthly rent payments or persistent service charge arrears.
Taking action before a tenant files for insolvency gives you a much wider range of options, including CRAR (Commercial Rent Arrears Recovery) or peaceable re-entry, which may be blocked once a moratorium begins.
Landlords facing tenant insolvency must evaluate their commercial lease security, including rent deposits and AGAs, while identifying if the specific insolvency procedure (like Administration) imposes a moratorium on enforcement. Key options include claiming rent as an administration expense if the tenant remains in occupation or serving direct payment notices to sub-tenants. Strategic negotiation for a lease surrender can also be an effective way to regain control of the property and mitigate long-term losses.
David Burns, Senior Litigation Partner at Ronald Fletcher Baker LLP, has extensive experience handling issues related to commercial tenants who have breached the terms of their lease. For inquiries on this topic, please contact David Burns via email at D.Burns@rfblegal.co.uk or by phone at 07762318409.
David Burns
Senior Litigation Partner
