A common problem for a landlord is how to deal with a tenant that becomes insolvent. This article considers common forms of insolvency processes, what they are and how they might affect a landlord's rights. The options are considered in relation to a company.

The four key options available to a landlord are:-

• Seek to forfeit the lease;
• Agree with the tenant to surrender the lease for a premium;
• Exercise a CRAR procedure - the recent procedure for dealing with commercial rent arrears recovery;
• Litigate or sue the tenant for the outstanding debt.

Some of these options may be modified if the tenant enters into one of the many forms of insolvency processes.

CVA

A creditor's voluntary arrangement (CVA) is an agreement between a company and some of its creditors to settle its debts. The company will continue to trade on.

Unless a company has applied for a moratorium there is no bar to a landlord bringing proceedings. However, if a CVA arrangement is agreed between creditors the landlord will most probably be bound by the agreement in relation to its debt.

Winding up or Liquidation

Liquidation signals the end of the road for a company and allows for the realisation of assets by a liquidator in an orderly manner. There are two types of liquidation, voluntary and compulsory. A company may enter liquidation voluntarily or may be pushed into liquidation by a creditor. In each process the company comes to an end.

There is no bar on commencing proceedings against a tenant if they enter voluntary liquidation.  However, the liquidator may apply to court to restrain proceedings if he feels it may hinder his job. As liquidation means the company is no longer trading it will often have no need to retain leasehold premises. In this instance a landlord is able to exercise CRAR, sue for unpaid rent or forfeit the lease.

If a company is in the process of being compulsorily wound up, or a winding up petition has been presented, a landlord will need the leave of the court to take any action or proceedings against the tenant. This provision is set out in section 130(2) of the Insolvency Act 1986. An exception to this is peaceable re-entry which is not construed in this context as legal proceedings. CRAR may be continued if it was commenced before the presentation of a winding up petition but another creditor may apply for it to be stayed or the monies may be claimed for the benefit of the liquidation (if obtained within 3 months of the liquidation).

Administration

Administration is a rescue process whereby a company enters into a moratorium whilst the administrator works to save or restructure the business.

If a company is in administration, or has filed an 'intention' to appoint an administrator an automatic moratorium against anyone commencing proceedings comes into immediate effect. As such, a landlord who is owed rent is prevented from taking any action without either the leave of the court or permission from the administrator. If such an application is made, the court will need to consider the rights and benefits of allowing the litigation to be commenced against the benefits or potential harm to the administration. The principles upon which this test is conducted is set down in the case of Atlantic Computer Systems PLC [992] 2 WLR 367.

There have been a number of cases over the past couple of years that mean that the position of the landlord and their ability to claim rent from an administrator has changed. The case of Goldacre (Offices) Ltd v Nortel Networks UK Ltd (In administration) [2009] EWHC 3389 (Ch) was overturned this year and it is now clear that rent can be apportioned in cases of insolvency and that an administrator is liable to pay for the period when the property is used for the administration. However there are still grey areas as to what counts as the administrator 'using' the property for the benefit of the administration. For example, it is still unclear how this rule should be applied where the property has been used purely for storage. Case law will most probably continue to ponder such questions.

If you are worried that a tenant may, or may shortly be, insolvent we recommend seeking legal advice before taking action.