What do I do if my tenant or landlord becomes bankrupt or insolvent?
If either a tenant or a landlord becomes insolvent or bankrupt, then the tenancy will become vested in either a liquidator or trustee in bankruptcy (TiB).
If the interest cannot be sold, or is likely to result in the insolvent party incurring further expense, the trustee or liquidator have powers under the Insolvency Act 1986 (“IA 1986”) to disclaim “onerous property”, which includes leasehold property.
Disclaimer ends all interests, rights and liabilities of the insolvent party under a lease from the date of the disclaimer notice.
If a tenant disclaims their lease, will the liability of any guarantors under the lease or former tenants under an authorised guarantee agreement (“AGA”) come to an end?
Unfortunately, not. The courts have made it clear that disclaimers only end the interests of the insolvent party in the property. Essentially the provisions of IA 1986 allow the disclaimed lease to continue for the purpose of enforcing any guarantors’ obligations. A guarantor can either be a guarantor under the lease or a former tenant of a post -1996 lease who entered into an AGA on assignment, or an original tenant in a pre-1996 tenancy. As a result, after disclaimer, guarantors remain liable for non-payment of rent and other tenant covenants in the disclaimed lease until it expires or is determined. Depending upon the terms of the guarantee, a guarantor could also be asked to take a new lease.
If a landlord receives a disclaimer notice they should check if there are any guarantors available. Where there are, the landlord may wish to pursue them for any rent arrears or ask them to take a new lease. A landlord who does wish to ask a guarantor to take a new lease should be careful not to take any action that would amount to taking back possession of the property. If the landlord re-enters the property or otherwise takes back possession of the property the lease will be regarded as ended for all purposes at that point and the landlord will lose the ability to pursue the guarantors.
In an economic downturn, when commercial property may be very difficult to re-let, landlords should take advice on what might be considered taking back possession in order to preserve any right to pursue the guarantors.
If a head tenant disclaims their lease, what effect does it have on the sub tenant?
If a head lease is disclaimed the insolvent head tenant is released from its rights and obligations as both tenant under the head lease and as landlord under the sublease. At the same time, the subtenant’s rights against and obligations to the insolvent head tenant are also extinguished from the date of the disclaimer notice. The subtenant does still have a right to remain in occupation of the property for the term of the sublease but this is subject to paying the rent and complying with the other covenants under the disclaimed head lease, which could be more onerous. The head lease terms are not enforceable between the subtenant and landlord. This is not very satisfactory for either landlord or subtenant. In these circumstances, where the subtenant wishes to remain in occupation of the property, we would recommend that on receipt of a disclaimer notice the subtenant seeks advice immediately on applying to court for a vesting order to have the head lease vested in them.
Contact our commercial property lawyers in Brighton & Hove, Uckfield, Sevenoaks and Ashford
If you need advice in relation to your landlord or tenant becoming insolvent please don’t hesitate to reach out to Joanna Bryan e. firstname.lastname@example.org in our commercial property team in the first instance who can work alongside our dispute resolution and insolvency teams to provide you with tailored advice in this area.