Written by: Will Thompson on 7th April 2022
If one of your commercial tenants is insolvent, it can quickly have a knock-on effect on your own business. You may have suffered rent arrears and/or unpaid maintenance fees in the time leading up to their insolvency. But being insolvent doesn't necessarily mean they'll close down.
Depending on the circumstances, a commercial property tenant may have options that allow them to continue trading and operating from your premises. They might be able to formally renegotiate their debts as a whole, for example, or secure emergency funding to carry on in business.
So, what should you do if a commercial tenant enters insolvency, and can you mitigate your own risks at this time?
Before we look at forfeiting a commercial lease and/or repossessing the property. The Coronavirus Act, 2020, brought in restrictions on commercial landlords' ability to enforce unpaid rent debts.
Currently in place until 31st March 2021, you cannot forfeit your commercial lease, serve a petition, or issue a statutory demand, if your tenant has had to cease trading due to the effects of coronavirus.
But what would forfeiting your commercial tenant's lease involve, and how should you proceed?
There's typically a clause in a commercial lease that allows for forfeiture in the event of a tenant entering insolvency. This means you can regain possession of the property, and the lease is terminated.
It's important to seek professional legal advice before forfeiting a lease due to rent arrears. It may prevent you from claiming for unpaid rent in the future, or for damages if your tenant has failed to fulfil other obligations under the lease.
If your tenant enters company administration or compulsory liquidation, you won't be able to forfeit the lease without seeking permission from the office holder or the courts.
Depending on the circumstances, repossession may not be advisable for a commercial landlord. You could still receive some rent from the administrator if the company enters administration after corporate insolvency. Whereas if you evicted your current tenants and repossessed the property you'd be left without rental income. Furthermore, the administrator may want to sell the insolvent business as a top concern, in which case a new commercial tenant could move in.
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Written by: Will Thompson on 7th April 2022
Will is an auction surveyor at Pugh & Co, representing a wide range of vendors, including local authorities, charities, and corporate and private clients, on the disposal of all types of property and land. Will can provide advice on the value and disposal strategies of residential, commercial, and industrial properties/portfolios, as well as sites with development potential. He holds an MSc in Real Estate and is a member of the National Association of Valuers and Auctioneers.
