The effect of tenant administration on commercial leases

Against the backdrop of interest rate rises and economic difficulties, the renowned British high street retail chain Wilko (formerly Wilkinson, as some may remember it) has announced that it has entered administration. Whilst the news is most certainly of concern for the thousands of Wilko employees, Wilko’s commercial landlords will no doubt share a degree of concern about Wilko’s future.

The legal and commercial implications for landlords when a tenant enters administration can be substantial – especially if such tenants are anchor tenants in a shopping centre, retail outlet or high street. When faced with a tenant in administration, landlords must undertake a difficult analysis of hedging the tenant’s chances of financial recovery and prospective future financial performance against their own property portfolio strategy and income from the lease.

What is administration?

The ultimate objective of administration, as governed by the Insolvency Acy 1986, is to rescue an insolvent company (or part of the insolvent company) as a going concern. Failing that, it must try to achieve a better result for the creditors of the company and, failing that, it must realise the property of the company in order to distribute proceeds to pay off debts to secured/preferential creditors. Administrators appointed by a company have a great deal of autonomy in their role, acting as agent for the company and have the ability to enter into contracts on behalf of it.

However, unlike other insolvency measures (such as CVAs or Part 26A restructuring plans) there is no practical ‘window’ for a commercial landlord to mitigate their losses between (i) the decision of the company going into administration and (ii) the appointment of the administrator/administration order coming into effect. As such, landlords often have to play the hand dealt and mitigate as best as possible.

The administration process also initiates a moratorium period during which landlords are prohibited from taking legal action against the tenant in administration, including termination of the lease. The moratorium is designed to ‘calm the storm’ and aims to provide the company with the opportunity to stabilise its financial situation, potentially restructure, and (hopefully) continue operations.

How does this affect me, a commercial landlord?

The rights of commercial landlords with a tenant in administration are extremely limited.

Leave of the court or permission of the administrator is required before the commercial landlord can exercise a number of proprietorship rights, including: forfeiture, commercial rent arrears recovery (‘CRAR’), instigation of court proceedings and their right to enforce security (e.g. a charged rent deposit).

Leave may be granted in limited circumstances where the exercise of such rights does not impede the administration process and if the landlord can prove that denial of such rights would be inequitable (as per the decision in Innovate Logistics Limited (in administration) v Sunberry Properties Limited [2008] EWCA Civ 1261).

The moratorium also means a temporary halt to the ability for a landlord to repossess the property or forfeit the lease due to tenant breaches. This can be particularly difficult for commercial landlords who are considering or in the process of enforcing breaches of the lease and/or seeking recovery of arrears.

However, the case of Pillar Denton Ltd and others v Jervis and others [2014] EWCA Civ 180 (“Pillar Denton”) provides some potential respite for commercial landlords faced with tenants in administration – albeit in limited circumstances. Pillar Denton confirmed that if administrators hold leasehold premises for the benefit of creditors during administration (e.g. holding a lease of a shop to sell off stock), the administrator must pay the rent prescribed under such lease to the landlord for the entire period of occupation as an expense.

Key considerations for landlords

Monitor your tenants: landlords should monitor the administration process closely. Staying informed about the progress, potential changes in the tenant’s circumstances, and any new developments is essential to making informed decisions that protect the landlord’s interests. Reviewing tenant liquidity during the term of a lease (i.e. prior to insolvency events) and checking in on company performance are steps that landlords can take to keep informed and potentially prepare for the likelihood of tenant insolvency.
Communication: engaging with the appointed administrator is paramount. Landlords should consider communicating their concerns, discuss existing obligations and terms under the lease, and explore potential rental payment arrangements during the administration period. Establishing an open dialogue will help landlords comprehend the tenant’s financial situation, the administrator’s plans and the potential impact on the property. Collaborating with the administrator could also lead to mutually beneficial solutions, such as negotiated rental terms or the continuation of lease agreements.
Rental Income: while the administration process imposes a moratorium on eviction and forfeiture actions, administrators must pay rent as an expense of the administration if they are keeping the property open for business.
Rent Arrears: if the premises demised by the lease is not being used, any rent arrears that accrued before the administration and due under the lease are considered unsecured debts. Recovering such arrears may prove challenging given the priority awarded to secured and preferred creditors during the administration process.
Termination: in certain cases, administrators may decide to end leases as part of the restructuring process. Landlords should request to be informed about any decisions that impact their property and leasehold interests.
Mitigating Losses: If a tenant’s administration leads to lease termination, landlords should explore strategies to mitigate potential losses. This could involve proactive efforts to find new tenants or negotiating with administrators to facilitate a smooth transition. Being proactive increases the likelihood of minimizing financial disruptions caused by vacant properties.

Conclusions

The tension between the proprietary rights of landlords against the statutory rights of company tenants is well documented in case law. Administration is a recognisably difficult and unpopular area with commercial landlords as it denies them many rights that they would have ordinarily relied upon.

Dealing with a commercial tenant in administration is a multifaceted challenge that demands careful consideration and strategic planning on the part of landlords. By proactively engaging with administrators, seeking legal advice, and maintaining open communication, landlords can effectively navigate these situations and ensure the best possible outcome for their property interests.

Sharpe Pritchard’s real estate team offers advice and guidance to landlords and tenants across the full spectrum of property issues. If you would like to discuss your options in connection with a tenant in administration or any other insolvency measure, please contact James Nelson (jnelson@sharpepritchard.co.uk) or on 0207 405 4600 for a free initial consultation.

For further insight and resources on local government legal issues from Sharpe Pritchard, please visit the SharpeEdge page by clicking on the banner below.

This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published. If you would like further advice and assistance in relation to any issue raised in this article, please contact us by telephone or email enquiries@sharpepritchard.co.uk

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