The media is awash with speculation that companies will be forced out of business by the COVID-19 lockdown, despite efforts by the government to provide support. This is a worrying time, not just for those companies, but for their landlords who face being left with unpaid rent bills and vacant units.
Entering an insolvency process is not necessarily a bad thing
Just because a tenant enters an insolvency process, does not mean that the tenant is ceasing to trade. The insolvency and restructuring profession is, particularly in cases caused by COVID-19, focused on restructuring businesses to enable them to continue as a going concern.
Many companies in difficulty would be viable trading companies but for the COVID-19 lockdown and/or the social distancing requirements. We expect to see some of those companies entering “Administration”. The primary purpose of administration, from the menu of grounds set out in Schedule B1 of the Insolvency Act 1986, is likely to be the rescue the company as a going concern.
When a company is in administration there is a moratorium. Its creditors cannot issue proceedings for unpaid debts or enforce existing judgements. This provides the administrators and the directors with breathing space to find ways of preserving the value in the company for the benefit of the creditors as a whole, including landlords.
Administration is a flexible procedure. The administrator can take over running the company, or delegate powers to the existing directors to run the company. Where the only or main reason for the company’s difficulties is COVID-19 existing directors are likely to retain day to day control of the company. This is what is happening in the Debenhams administration. It is known as a “light touch administration”. Meaning putting companies into cryogenic stasis, freezing them for a period of a few months and the idea is you wake them up at the end of it”. The purpose is to stabilise the company during the current crisis.
What administration means for landlords
When the current forfeiture prohibition is lifted (currently 30 June, but this may change), if a tenant is in administration the landlord will not be able to forfeit the lease.
If a tenant in administration decides to retain premises for the benefit of creditors, the rent will be payable as an expense of the administration.
What happens at the end of administration
Either the company will be rescued, or it will enter liquidation.
Rescue – a perfect rescue would involve the company refinancing and all debts being paid in full.
A more likely outcome is rescue via a formal or informal arrangement with creditors. Landlords should expect to be approached by administrators or the existing directors with proposals. These may include rent holidays, rent waivers, reduction of rent, variation of duration of lease or other lease terms, changes to dilapidation provisions or break clauses. Landlords will need to consider proposals carefully and balance accepting the proposals against having an empty unit (and the additional costs that entails). Landlords should also bear in mind that if the majority of creditors vote in favour of a Company Voluntary Arrangement (CVA) certain changes may be imposed even if the landlord does not agree. In many cases it will be advisable for the landlords to seek to negotiate to share some of the tenant’s pain caused by COVID19.
Liquidation – the company will cease to trade. The liquidator is likely to disclaim the lease, leaving the unit empty.
Many landlords feel they have been pushed to the bottom of the pile of creditors by the prohibition on forfeiture. A tenant entering administration may well be a positive outcome in those circumstances as it gives the landlord some assurance that the tenant is looking to treat all creditors, including the landlord fairly.
We are expecting to see a significant rise in the number of vacant commercial properties and all that that entails. Please click here to view my colleague, Simon Tucker’s article on ‘What is next for commercial leases?’. Landlords should start considering all potential options for properties in their portfolio now, so they are prepared in the event of a tenant entering an insolvency process.
We recommend that landlords and tenants take advice as early as possible on the effect of or use of the administration process to overcome COVID-19 related problems. Simon Tucker, Robyn Adams and other lawyers in the team have significant expertise in insolvency issues facing both landlords and tenants.
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.