Effect of New Insolvency Act 2000 on Landlord's rights

United Kingdom

Effect of New Insolvency Act 2000 on Landlord's rights

  • Landlords will now be subject to a moratorium on the insolvency of its tenants.
  • The Insolvency Act 2000 (the Act) received Royal Assent on 30th November 2000 and it is due to come into force within the next few months.
  • The Act removes the right to peaceably re-enter premises of tenants the subject of a voluntary arrangement or in administration.
  • This overturns the two recent court decisions of Re Lomax Leisure Ltd (1999) and Clarence Cafe Limited v Comchester Properties Ltd (1998).

Background

The Act has attempted to deal with, amongst other things, two issues which worked against the principle of "freezing" creditors rights while a rescue plan for a company in financial difficulty was put in place: first, the ability of creditors to enforce their rights where companies are preparing for a voluntary arrangement with their creditors, upsetting the whole voluntary arrangement; second, the two recent cases (mentioned above) which held that landlords could peaceably re-enter premises of a tenant company in administration - a useful threat in a landlord's armoury.

The Act

The Act has now introduced a "moratorium" (ie a stay of action against a company) during the period leading up to a Company Voluntary Arrangement. (footnote one)

This did not exist before, although it is only available to small companies (generally satisfying two of these conditions: a turnover of less than GBP 2.8 million, having less than 50 employees and a balance sheet total of not more than GBP 1.4 million). During the moratorium (which will not normally last more than 28 days, unless extended) a landlord will not be able to take any legal proceedings against the tenant and will not be able to distrain or peaceably re-enter the premises or call upon a rent deposit charged by way of security. In short, a landlord can do nothing but participate in the voluntary arrangement and either vote for it or against it.

For Individual Voluntary Arrangements (footnote two) a similar moratorium already existed (called an "interim order") but now the Act prevents a landlord from peaceably re-entering premises and distraining for rent during the period of any interim order.

Where a tenant company is the subject of an Administration Order (footnote three) a landlord could never take any proceedings against the tenant company or distrain for rent (without leave of the court or Administrator) but could peaceably re-enter premises. A landlord cannot now peaceably re-enter premises of that company. This probably has greater impact on landlords because larger companies, often with numerous properties are more likely go into Administration in order to effect some form of rescue of the company. Most recently Uno plc.

What Can a Landlord Do?

The landlord's rights and remedies will vary depending on whether the voluntary arrangement is intended to compromise existing debts of the company or deal with future affairs, whether the company is in administration or ultimately the subject of a voluntary arrangement. The landlord may also hold a security rent deposit or have guarantors or others to whom the landlord may look. The following are the options available to a landlord:

1) Whilst the moratorium is in place there is little the Landlord can do (other than prepare for the meeting where the company's proposals will be considered).

2) If the Voluntary Arrangement is approved, the landlord will be bound by it (unless it can challenge it on the ground that it is unfairly prejudicial to the Landlord).

3) The Landlord will not be bound to the extent of any security it may have; however, it must be careful to preserve that security. The Right to forfeit is not "security" for this purpose.

4) The Landlord may have recourse against guarantors/previous tenants.

5) If an Administration Order has been made the moratorium will apply whilst the Order is in force

6) Once a Landlord becomes aware that a tenant goes/is to go into a voluntary arrangement or administration it should contact the nominee/supervisor (in the case of the voluntary arrangement) or administrator (in administration) and ensure future rents will be paid if the tenant wishes to utilise the premises.

Conclusion

The effect of the Insolvency Act 2000 is that landlords will no longer be able to forfeit leases by peaceable re-entry whilst a voluntary arrangement is being considered or an administration order is in force. Whilst there is a theoretical right to apply to the court for an order to effect peaceable re-entry, in practice, the landlord may as well serve proceedings for forfeiture, which too will require the consent of the court or the administrator. It seems that the Act is another nail in the coffin of peaceable re-entry.

For further information, please contact Richard Hanson at [email protected] or on +44 (0) 20 7367 2903 or Pranai Karia at [email protected] or on +44 (0) 20 7367 2742.

This article first appeared in Property Week on 9 February 2001.

Footnotes

Footnote one A COMPANY VOLUNTARY ARRANGEMENT provides a means for financially troubled companies to reach agreement with its creditors in satisfaction of its debts. It is an alternative to liquidation and can lead to a greater return to creditors.

Footnote two An INDIVIDUAL VOLUNTARY ARRANGEMENT is similar to the Company version but for individuals as an alternative to bankruptcy proceedings.

Footnote three An ADMINISTRATION is the protection of a company and its assets by the Court whilst it is prepared to be sold as a going concern or rescued or whilst a voluntary arrangement is put in place.