With store closures across the UK, the future of retailer Wilko still hangs in the balance. Many commercial landlords will be seeking repayments for outstanding rent and regaining access to their vacated commercial properties.
Director Daniel Long, a specialist at WHN Solicitors in resolving disputes between landlords and tenants of commercial properties, explores the position of the landlord across the most common corporate insolvency regimes and what remedies are available.
In recent times, there has been a rising number of retail store closures in the UK. Alongside the announcement that Wilko is now in administration and the potential closure of all its 408 stores, we have also seen McColl’s (1,300 stores), Sofa Workshop (16 stores), TM Lewin (150 stores) and Jaeger (13 stores) going into administration in the past three years.
For commercial landlords affected by such closures, there are several routes that are taken to deal with failed retailers. Each offers different procedures and outcomes. The different forms of corporate insolvency have varying effects on landlords’ rights to terminate tenancies, to pursue rent arrears, to draw down from a deposit or pursue third parties such as guarantors and sub-tenants.
Company Voluntary Arrangement (CVA)
A CVA is a time-limited statutory compromise to discharge liabilities. A CVA will bind all creditors – even those voting against the proposal – if the proposal is supported by 75 per cent of creditors by value.
There is no moratorium, so all remedies remain available to landlords for breach of covenant unless they are specifically removed by the CVA. While the right to forfeit will remain available for failure to pay rent, this will not be available for any rent compromised by the CVA. The right itself cannot be removed or modified by the CVA.
Subject to the terms of the CVA, other remedies of drawing down from a deposit held, issuing court proceedings, exercising Commercial Rent Arrears Recovery (CRAR) and pursuing guarantors or sub-tenants will all remain available to landlords. It is possible for guarantors to be released although this is susceptible to challenge.
Landlords should carefully check the terms of a CVA proposal and consider whether the terms are unfairly prejudicial by comparing the landlords’ position in other insolvency regimes and to other creditors in the CVA. Successful challenges, however, have been few and far between.
However, landlords should consider whether the CVA proposes to release guarantors, interfere with a right to forfeit or allow for certain creditors to be paid in full. Authorities over recent years have held that it is not automatically unfair to reduce ongoing or future rent liabilities. Landlords should act quickly upon receiving the CVA proposal as there is only a limited window to bring a challenge.
When a business goes into administration
The purpose of administration is to rescue the failing company as a going concern. If that cannot be achieved, to protect creditors by achieving a better outcome than liquidation or, failing that, to realise property for the benefit of creditors. Administration is about protecting the company, its business and its ability to employ.
Once a notice of intention to appoint an administration has been filed, the company benefits from a moratorium. Landlords cannot peaceably re-enter, issue any form of court proceedings or exercise Commercial Rent Recovery (CRAR) without leave of the court or consent of the appointed administrator, depending on the timing.
Drawing down from a rent deposit remains an option in this scenario, but landlords would be prevented from compelling a tenant in administration to top it back up. Pursuing sub-tenants is likely to be difficult, therefore pursuing any guarantors is likely to be the best source of recovery.
Where the premises are used for the benefit of the administration, rent remains payable.
Winding-up options for businesses
The purpose of winding-up a company is to end contracts, realise assets/debts, make distributions to creditors (where available) and dissolve the company.
Upon a winding-up order being made, no action shall be continued or commenced against the company without leave of the court. However, landlords can still peaceably re-enter and, in time, may also find that forfeiture by proceedings remains available if the landlord is not also claiming arrears.
Court proceedings cannot be issued and CRAR would be void. Landlords can still pursue guarantors but would not be able to pursue sub-tenants where CRAR is not available. Ongoing rents remain recoverable if the property is being used for the benefit of the liquidation, in a similar way to how it works with administration.
Landlords should be aware that liquidators also have the power to disclaim onerous property and a lease will almost always be deemed onerous. Parties with an interest in the property can apply for a vesting order. In the event of disclaimer, a guarantor’s liability will remain unless the landlord re-takes possession. Sub-tenants will have a right to remain on the terms of the disclaimed lease.
Other forms of administration/re-structuring
A form of ‘light touch’ administration was brought about by the Corporate Insolvency and Governance Act 2020. It is largely identical to administration save that current and future rent must be paid in full.
A moratorium of 20 business days can be obtained where an insolvency practitioner files documents indicating the company is unable to pay its debts and confirms it is likely the moratorium would result in the rescue of the company as a going concern.
The impact on landlord remedies is the same as with administration. The moratorium is extendable up to one year by consent or on an unlimited basis by the court. If the insolvency practitioner at any point considers the company is unable to pay, the moratorium must be ended.
Part 26A of the Companies Act 2006 allows a re-structuring plan between a company and its creditors in a similar way to a CVA. Dissenting creditors can be bound. Guarantor liability remains intact.
The importance of seeking legal advice
Despite recent speculation that up to 71 of Wilko’s store leases will be taken over by Poundland owner Pepco, and B&M agreeing to buy 51 of Wilko’s buildings, it still leaves most Wilko’s UK stores set to close, leaving many commercial landlords facing uncertainty regarding rent debt and property access.
In all scenarios regarding tenant insolvency and business closures, landlords should obtain prompt legal advice to understand how their remedies against tenants might be impacted by any of the above corporate insolvency schemes.
See also our article regarding recovering debt from a business facing insolvency.
Daniel Long is a director at WHN Solicitors and heads up the firm’s commercial department and property disputes team.
He specialises in resolving disputes between landlords and tenants of commercial leases. If you are landlord dealing with a commercial tenant whose business has gone into administration and wish to discuss your options, please contact Daniel on 0161 761 8063 or email him at email@example.com