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Apart from HMRC, a common creditor is the landlord.

One of the things we need to consider when advising the director of a company facing financial difficulties is its overall financial picture.  

We have to find out what liabilities are due and whether any creditors threatened or started any recovery action against a company for payment.

Apart from HMRC, a common creditor is the landlord. We will try to establish what amount of arrears there are and how long the arrears have been outstanding for. Sometimes it can be the level of rent itself that has caused a company to get into difficulties in the first place.

Many companies will have long leases that last for several years and the terms may have been reasonable when the lease was first entered into but some years down the line, with such changes in the economy, the rent could now be well over market level and companies may struggle to be able to pay its rent. Some leases will include a break-clause which gives both parties the ability to bring the lease to an end part way through with a certain amount of notice.

Many landlords are facing tough times too. If commercial tenants can’t agree a rent holiday or reduction with their landlords they may be forced into an insolvency procedure leaving the landlords with a debt that may not be paid and empty premises to try to let out to new tenants, possibly for a much lower rent than they did before.

Many landlords will have insisted upon personal guarantees from directors to give themselves some level of comfort that they can pursue a director personally for any liabilities due under a lease if the company fails to pay. Landlords can also forfeit (terminate) a lease to take back their premises or issue distraint proceedings (seize goods belonging to the tenants to cover the costs of the rent arrears). 

If we are appointed as liquidators over a company owning a lease we have several options.  If there is any value in the lease, we can look to assign it to a third party in exchange for a premium. A landlord cannot reasonably refuse to allow a lease to be assigned to another party so long as the rent is up to date. It can mean having to pay the rent from the assignment proceeds but sometimes this can be profitable to us.

More realistically however there will be no value in a lease and we will look to either voluntarily surrender the lease with the landlords consent, enabling them to issue a new lease to a new tenants or we can disclaim our interest in it, effectively bringing the lease to an early end.

In an administration, more often than not, an administrator will want to trade a company, either to finish off profitable work/contracts or to be able to sell the company on a going concern basis and maximise realisations. An administrator has to pay the costs and expenses incurred from the date of our appointment and these get paid out of the realisations in the case.

In an administration procedure rent becomes a thorny issue for insolvency practitioners 

(“IPs”) because most rent is due to be paid on a quarterly basis and the current law states that if an administrator is using a landlords premises when the quarter first begins, they have to pay rent for the entire quarter regardless of how long they trade for.  

So if we were to trade from 31st December and the rent quarter starts on 1st January, we would have to pay rent until 31st March, even if we only traded a few days. The rent could be a serious sticking point as to whether or not an administration procedure is viable and could mean that a rescue of a business is not possible because the costs are too high for a rescue to be beneficial.

If the landlord has any claim for dilapidations (work required to the building to put it back in the condition it was in when first rented) then their claim ranks alongside all the other creditors.

David Kirk ACA FABRP

David Kirk

David Kirk is a Chartered Accountant and Licensed Insolvency Practitioner.
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