What happens if your tenant goes bust?
Your tenant is a business. And that business could go bust out of the blue. Here's what to do if that happens.
Your tenant is a company, and companies - big and small - can go bust without warning. It’s more likely, though, that they will start to experience cash flow issues first, so if your tenant falls into arrears on their rent, act quickly, as it could be that the business is in serious difficulty. If a company becomes insolvent, it does not have enough assets to pay its creditors and you could find yourself with a large amount of rent owed that you can never recover.
In the first quarter of 2013, there were 3,619 corporate liquidations and 935 other corporate insolvency procedures. Although you’ll find various figures quoted, around two-thirds of all new businesses fail within the first five years, and hospitality, restaurants and bars have a significantly higher failure rate than other businesses. So the first step as a landlord is to make sure you don’t open yourself up to unnecessary risk with the type of tenant you accept and you carry out thorough company referencing, which should be done via a specialist. If you want to do some initial checks yourself, you can use the Companies House WebCHeck service to see how long the business has been trading, whether accounts have been filed up to date, and you can also order copies of public documents, such as annual returns, for just £1 each.
If your tenant does go bust, the first thing to do if they vacate the premises is to contact your insurer to alert them to the fact that your premises are unoccupied. Next, find out what kind of procedure they’re subject to - administration, compulsory liquidation, voluntary liquidation, receivership, voluntary arrangement or some other procedure – because each has different implications for a landlord. In all cases, the most important thing is that you contact the person dealing with the process as quickly as possible, whether that be an administrator, a liquidator, the tenants/debtors themselves or a receiver.
The precise details are complex and you should consult a commercial property legal specialist but, as a general overview:
If the premises are continuing to be used, either by your tenant or in the business if carrying out the procedure, you should still be paid ongoing rent. In the case of Administration, you may be asked to reduce or waive rent in order to help the sale of the business and keep it trading.
In most cases, arrears will not be paid. In the case of voluntary arrangement, where a deal is struck between the majority of creditors (75% of value of debt) and the tenant, a compromise will be proposed so you should receive a proportion of the rent owed. Read the proposal carefully and put your case forward early. If the company has gone into receivership and the tenant is insolvent, banks and other secured creditors will be paid first. You, as one of a number of unsecured creditors, are essentially at the back of the queue and may receive little or nothing of any remaining assets.
You should be able to gain entry and possession in all cases, but only on advice from a legal expert as this is a dangerous and can be a long-winded route. However, if you’re continuing to receive rent – even a reduced rent - while the premises are being used during the process, you may be better off leaving things as they are, in the hope that the business may be taken over. Having some income is better than empty premises, which after three months, will leave you liable to business rates (see article on commercial business rates)
Pursuing for rent arrears or damages through the courts. You can usually pursue the tenant, sub-tenant or guarantor through the courts, but if there is no money in the business, it is better to spend your time securing a new tenant.
The best way to protect yourself is to take action before any procedure has begun. You can make periodical checks on your tenant via Companies House where you can download accounts. If it appears that the business is in trouble, then consider easing the tenant’s cash flow by moving to monthly payments. If they are late paying rent (according to your legal agreement), you can serve notice that you intend to seize assets or retake possession of the premises.
If you can’t anticipate them going bust, all you can do is act quickly. Speak to a legal specialist as early as possible and be ready to put forward your case.