Rent is often one of the first large payments a struggling company starts to miss.
Perhaps sales have fallen. A major customer is late paying. HMRC is pressing. Wages have to be found on Friday… and the money6 for the quarterly rent simply isn’t there.
That creates an awkward relationship with the landlord because the premises are normally essential to keeping the business alive.
So what should directors actually do?
Don’t ignore the landlord
This sounds obvious, but it happens surprisingly often.
A director misses the rent, hopes next month will be better and avoids the landlord’s calls.
That usually makes matters worse.
If the underlying business remains viable, an early conversation may produce breathing space. A landlord may prefer an agreed repayment plan, temporary concession or negotiated surrender to an empty building and an insolvent tenant.
But go into that conversation with numbers.
How much can the company genuinely afford? When? What does the next 13 weeks look like?
Promising £20,000 next Friday when you know the company won’t have it achieves nothing.
Understand what the landlord can do
A commercial landlord has several potential remedies, depending upon the lease and circumstances.
One is forfeiture.
Most commercial leases contain a right of re-entry allowing the landlord to bring the lease to an end following specified defaults. Non-payment of rent is commonly one of them. A landlord may potentially forfeit through court proceedings or, in appropriate circumstances, peaceable re-entry.
That can be devastating if the company needs the premises to trade.
The landlord may also have access to Commercial Rent Arrears Recovery, usually called CRAR.
CRAR is a statutory procedure allowing a landlord of wholly commercial premises to instruct an enforcement agent to take control of a tenant’s goods for qualifying rent arrears. It applies to rent itself, including certain interest and VAT elements, rather than every sum that might be described as payable under the lease.
So don’t assume the landlord is simply another unsecured creditor while the company continues trading.
Before formal insolvency, its position can be considerably stronger.
What happens in liquidation?
Rent already owing when a company enters liquidation will ordinarily rank as a claim in the liquidation.
But the practical position becomes more complicated if the liquidator needs to retain the premises.
Perhaps machinery has to be sold from the factory.
Perhaps stock needs collecting and cataloguing.
Perhaps occupation is needed temporarily to achieve a better realisation.
In those circumstances, post-liquidation occupation can give rise to a liquidation expense for rent. The principle is essentially that if the insolvency estate takes the benefit of the premises for the purposes of the liquidation, it may have to pay for that benefit.
That is why a liquidator will want to make an early decision whether to…
Keep the premises?
Negotiate temporary access?
Move the assets?
Surrender the lease?
Disclaimer may also need considering where the lease represents an onerous liability.
Administration is different
Administration brings with it a statutory moratorium.
That can be enormously important where premises are central to preserving the business.
A landlord cannot simply exercise every remedy it might otherwise have been able to use. For example, forfeiture by peaceable re-entry during the moratorium requires the administrator’s consent or permission of the court.
That breathing space can make a difference where the administrator is trading the company or trying to sell the business.
But administration isn’t a way of obtaining free premises.
If the administrator uses the property for the purposes of the administration, rent may become payable as an expense.
What about a CVA?
Property costs are often one of the reasons a Company Voluntary Arrangement is considered.
A company may have a fundamentally viable business but too many sites, an expensive lease or historic rent arrears it simply cannot clear.
A CVA can sometimes restructure those liabilities while the company continues trading.
Landlords need careful treatment because their position isn’t always the same as an ordinary trade supplier, particularly where future rent and lease variations are involved.
A CVA therefore needs to be commercially sensible, not merely a mechanism for pushing losses onto landlords.
The lease may have value
Don’t automatically assume a lease is a liability.
A company might occupy premises at a rent substantially below current market levels.
There may be a long term remaining.
The location may be particularly valuable.
The lease might therefore have value to a purchaser, subject to its terms and the landlord’s rights.
Check:
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the remaining term;
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current rent;
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rent review provisions;
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assignment provisions;
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break clauses;
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repair obligations;
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rent deposit;
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guarantees;
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landlord consent requirements.
If a business sale is being considered, speak to the landlord early enough to establish whether an assignment or new lease is realistically available.
Personal guarantees need separate attention
Some directors have personally guaranteed lease obligations.
That changes the dynamics.
A director may understandably be very keen for the company to pay the landlord because they fear being pursued personally.
But once insolvency threatens, company decisions must be made with creditors’ interests properly in mind.
You cannot simply prefer the landlord because paying it reduces your own personal exposure.
Identify guarantees early and obtain advice about both the company’s position and your personal position.
They are related… but they aren’t the same thing.
Check the rent deposit
Many commercial leases involve a rent deposit.
Find the agreement.
How much is held?
What can the landlord use it for?
Does it reduce the landlord’s eventual claim?
The accounting records may show the deposit as an asset, but that doesn’t mean the money will simply come back to the company.
What should directors do when rent becomes unaffordable?
Start with facts.
Prepare:
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the lease;
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rent account;
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details of arrears;
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service charge position;
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rent deposit agreement;
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guarantees;
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correspondence with the landlord;
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details of any enforcement action;
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current cash flow forecast;
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details of other premises;
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realistic property requirements for the future.
Then consider the business itself.
Is this a temporary cash shortage?
Is the rent fundamentally unaffordable?
Does the company need all the space?
Could the landlord agree concessions?
Could the business relocate?
Would a CVA, administration, sale or orderly closure produce a better result?
Those are very different problems… and they need different solutions.
Takeaway checklist
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How much rent is actually outstanding?
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Has the landlord threatened forfeiture or CRAR?
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Is the property essential to trading?
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Is the lease above or below market value?
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How long remains on it?
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Can it be assigned?
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Is there a break clause?
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Is there a rent deposit?
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Has anyone given a personal guarantee?
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Are service charges and dilapidations also outstanding?
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Could the business operate from smaller premises?
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Is continued occupation genuinely in creditors’ interests?
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Has the landlord been approached with a realistic proposal?
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Has insolvency advice been taken before paying arrears selectively?
Final thought
Landlords are sometimes treated as though they’re simply another creditor on the list. They aren’t.
They control something the company may desperately need… the place from which it trades. That makes early engagement particularly important.
If the business can be saved, the landlord may need to be part of that solution. And if it can’t, dealing with the property properly can prevent an already difficult insolvency becoming considerably more expensive.
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