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Coronavirus: how do commercial landlords deal with the administration of a tenant?

There are unprecedented levels of support from the government through rates relief, the CJRS scheme and the relaxation of the wrongful trading provisions during the Covid-19 crisis.

In addition, many landlords are willing to agree to rent deferral, rent payment holidays or other ways in which to support their tenants with a view to sustaining their business when the lockdown ends. Unfortunately, however, all of this support will not save some tenants and they will be forced to consider administration as a means to salvage their business.

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What does a tenant's administration mean in practice?

Administration is a useful tool which allows insolvency practitioners to take over a company if they are likely to keep the business operating as a going concern, achieve a better return for the companies' assets, or recover funds for preferential creditors. Administrators benefit from certain protections against contractual enforcement or eviction to allow them time to achieve these aims, known as a moratorium, which affects what a landlord would otherwise do to enforce the contractual terms of a lease.

Most well-drafted leases will contain provisions for irritancy of the lease by the landlord as a result of the insolvency of the tenant. In the case of administration, the landlord is prohibited from exercising that contractual right because of the moratorium. Possession can only be recovered from a company in administration with consent of the administrators, or with leave of the court. It will, of course, be difficult to apply for a court order in the current climate.

Landlords should be aware that any arrears built up by the tenant company before its administration will be classed as unsecured claims, and can only be recovered from the funds left-over after all preferential creditors have been paid. Rent during the period of the administration should be recoverable if the administrators continue to possess the property, but this is limited to the rent actually applicable to the period of such possession, and not to any advance payments that may be required under the lease.

If the tenant pays rates directly, those will continue to be the liability of the company in administration, and do not pass over to the landlord on tenant insolvency. That can usefully limit costs for the landlord, if it does not have another tenant lined up to lease the property.

Not all forms of insolvency attract the same protections, and the government is proposing a further short-term moratorium against enforcement of debts during the current crisis by certain qualifying companies, but details of that proposal and how they will be applied are not yet known.

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Landlords should seek advice if they are concerned about a tenant rent default or receive notice of intended insolvency so that their rights and responsibilities can be explored.

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