High Street Woe: Advice for Landlords

The news of Toys R Us and Maplin entering administration will not have come as a surprise to most retail experts.

According to analysis by Deloitte, the number of retailers entering into administration in 2017 increased by 28% from 2016 figures. This increase certainly appears to indicate that companies are struggling within the sector and we shall have to see what 2018 brings. The focus is often on the tenant company when it enters into administration, but what should landlords do? Here is a reminder of 5 key points for landlords:

 

1. The lease continues.

The lease does not automatically come to an end when a tenant company enters into administration so if a landlord finds a new tenant it will need to take steps to end the lease before re-letting. An administrator has no right to disclaim a lease (unlike a liquidator) so the lease can only be determined if both parties agree or the landlord forfeits (see below for more on this). The administrator will be liable to pay the rent calculated on a daily basis whilst the business continues to occupy the property for the purposes of the administration. Once the administrator ceases to use the property for the purposes of the administration, his/her liability to pay the rent will end.

 

2. The landlord does not automatically become liable for business rates.

Once the administrator has ceased to use the property for the purposes of the administration, he/she will often invite the landlord to agree to a surrender. A landlord should think very carefully about this before agreeing as whilst the lease remains in place (even if the administrator is not using the property for the purposes of the administration), the landlord will not have a liability for business rates. As such, a landlord would be well advised only to accept a surrender once it has a new occupier lined up, it intends to occupy itself or it is pursuing an alternative scheme for the property such as a redevelopment.

 

3. Check your guarantees.

This is where guarantees can come in very handy both for the recovery of rent if the premises are not being used in the administration and/or to call upon a guarantor to take a new lease directly. Back in 2008 when Woolworths entered into administration, I acted for the landlord of Woolworths’ main distribution depot. The rent was significant, but the landlord was able to successfully pursue a guarantor for the outstanding rent and in the end that guarantor decided to take a new lease of the property.

 

4. Forfeiture is an option (although not a straightforward one).

When a company enters administration, there is a moratorium against claims meaning that a landlord cannot take steps to forfeit a lease (even though most leases give a landlord the right to do so when its tenant enters administration) without the permission of the administrator or the leave of the court. An administrator is likely to consent where the company has ceased to use the property for the purposes of the administration, but may well not grant his/her consent where the property is still needed for the administration. Where no consent is given, a landlord needs to apply to court for its permission to forfeit. The court would carry out a balancing exercise of the interests of the landlord and the creditors of the company before determining whether to allow the landlord to forfeit.

 

5. Beware the phoenix from the flames.

It is far from unusual for an administrator to sell part of the business to a phoenix company. When this happens, the phoenix company is often granted licence to occupy premises without the landlord’s consent to give it time to manage the transfer of the business to it and/or negotiate new occupational terms with the landlord. In the vast majority of cases, these licences will be granted in breach of the lease. If a landlord accepts rent from an administrator with knowledge of the licence, it may make it difficult to take action to require the administrator to revoke the licence in the future, so landlords should be careful before accepting monies in these circumstances.