Property problems: When your commercial tenant goes broke

Q. I own commercial premises which have been let for some time to a company which operates a retail shop. I have just found out that the company has gone bust. Where do I stand?

A. First you should clarify whether the tenant has been put into liquidation, or has had a receiver appointed (or possibly both). There are important differences.

Second, you should check the terms of the lease. Most modern leases will contain a provision allowing the landlord to terminate the lease in the event of the tenant being put into liquidation. If cancelled, the landlord would then look to recover possession, and re-let the premises. If there are arrears of rent, the landlord can make a claim as an unsecured creditor in the estate of the company in liquidation, or may be able to pursue any guarantor, depending on the terms of the guarantee.

If the company continues in occupation of the premises for the benefit of the liquidation, the liquidator will be liable for payment of rent and the performance of other covenants in the lease. Alternatively, the liquidator may disclaim the lease. If disclaimed, the rights and responsibilities of the tenant come to an end.

In some circumstances, disclaimer of the lease by a liquidator may affect the liability of a guarantor, although this will depend on the wording of the guarantee clause.

Many modern leases will also allow the landlord to cancel the lease if a receiver is appointed to the tenant. However, should the landlord decide to keep the lease alive, a receiver does not have power to disclaim the lease. In addition, the receiver will become personally liable for rent and other lease payments from 14 days after the date of appointment until the end of the company's occupation of the premises, or the end of the receivership, whichever occurs first. But this liability does not extend to performance of other covenants in the lease.

Again, the landlord can try to recover arrears of rent from the company in receivership, or from any guarantors.

Whether your tenant company is in liquidation, or has had a receiver appointed (or both), there will be a number of rights and remedies available to you as landlord. In any case, you should seek specific legal advice on both the extent and operation of your rights.

If the tenant company has simply ceased trading, without either a liquidator or receiver being appointed, the lease is unaffected. Rent will continue to accrue due, for which the tenant and any guarantors will be liable. That said, having your premises unoccupied is unlikely to be acceptable for any lengthy period. You may well have a right to re-enter the premises and cancel the lease, leaving you free to re-let to a better tenant. Before exercising any of your available remedies you should seek specific legal advice.

Had your tenant been an individual rather than a company and made bankrupt, the situation would have been different again. On being made bankrupt, the bankrupt's property, including the lease, passes to the Official Assignee. Like a liquidator, the Official Assignee has a statutory power to disclaim a lease. Once disclaimed, the bankrupt's rights, interests and liabilities in the lease are brought to an end. A disclaimer also releases the Official Assignee from any personal liability under the lease.

If the Official Assignee has not disclaimed the lease, and the landlord wants to bring matters to a head, the landlord can write to the Official Assignee requiring him to decide whether or not to disclaim. The Official Assignee then has 28 days to give notice as to whether to disclaim or not, otherwise the right to disclaim is lost.

Alternatively, the lease may contain a right for the landlord to terminate the lease and recover possession should the tenant be made bankrupt. The landlord would then look to re-let the premises.

The landlord is entitled to claim in the bankrupt's estate for any arrears of rent, although in most cases the amount recovered is likely to be minimal.

In almost all cases, the liquidation, receivership (or bankruptcy) of a tenant will see an end to the landlord and tenant relationship. If so, when you come to re-let the premises, you might consider negotiating a rent deposit or bank guarantee. This should improve your position as landlord in the future, as a deposit or guarantee could be used to offset against any arrears of rent which may arise. Again, your solicitor should be able to give you specific advice on this issue.

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