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Protection for commercial tenants when landlord is deemed insolvent

By Sara McGaughey, solicitor, commercial property department

As a way for landlords to protect themselves, commercial leases usually contain termination clauses which are triggered when the tenant fails to uphold their obligations - i.e., payment of rent.

However, the recession has caused a shift in patterns and recently we are seeing landlords becoming insolvent and therefore failing to uphold their obligations. In this scenario, where do tenants stand and what protection can be afforded to them?

The first issue is the matter of a deposit. This will be protected if it is held on trust by the landlord and is thus legally separate. To prevent a loss of the deposit, careful drafting of the lease and deposit deed is essential.

Both parties should ensure that documentation reflects that the deposit funds remain separate from the landlord's assets. That way, the deposit will not be seen as part of the landlord's estate if liquidators are appointed.

It depends on the wording of the lease if the tenant can withhold rent or organise a set-off of the rent owed to the landlord against what it owed to them. With regards to rent, it still needs to be paid and in most cases should be made payable to the liquidator or administrator.

The landlord's obligations under the lease still need to be fulfilled, thus offering some protection to the tenant. Under the Insolvency (Northern Ireland) Order 1989 power is conferred upon administrators and liquidators to enter into lease renewals and settle rent reviews.

This was confirmed by the Somerfield Stores Ltd v Spring (Sutton Coldfield) Ltd case, the outcome being that a delay in such matters would only result in the tenant suffering a loss and creditors either being adversely affected or unaffected.

If the landlord also gets his interest in the property from a lease, then the existence of this superior lease could be problematic for a tenant as it may be forfeited if the landlord cannot uphold its obligations under this superior lease.

This would result in the sublease (under which the tenant occupies the property) ceasing to exist and the subtenant losing the right to occupy the premises.

The subtenant can protect themselves and apply for relief from forfeiture but this would require them to pay all outstanding arrears and comply with the terms of the superior lease.

In conclusion, a tenant will not receive a lot of protection if their landlord becomes insolvent. They need to protect themselves by remaining vigilant, checking their landlord's history and ensuring the leases and deposit deeds are drafted carefully.

  • Sara McGaughey is a solicitor in the commercial property department in Worthingtons and frequently advises a range of clients on landlord and tenant matters. She can be contacted on 028 9043 4015

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