What happens if your landlord goes bankrupt?

Of course, the recession hasn’t just affected renters. Commercial property owners may also be at risk of insolvency. If you are a commercial tenant, what do you need to consider if your landlord goes bankrupt?

You may be lucky and it will affect you little, or it could be the beginning of a terrifying Kafkaesque nightmare!

This is a brief summary of some of the things to think about.

Will they tell you?

You will likely receive a letter from the Insolvency Practitioner (IP) dealing with your landlord’s insolvency informing you of the insolvency and telling you to continue paying your rent, service charge, insurance contributions, etc., but from now on to a different bank account. If the IP does not provide you with enough information or if you have any questions, you should contact the IP immediately.

What should you do?

Continue to fulfill your obligations under your lease as before. If you don’t, then the IP still has the benefit of your landlord’s rights to terminate your lease (forfeiture) for breach of agreement.

Make sure that your landlord’s obligations in the lease are met, for example, lighting and maintenance obligations for common parts.

Make sure the IP has details of any side letters or other side agreements that record special concessions or agreements you have made with your landlord that are not addressed in the lease. For example, you may have made a personal deal with your landlord to pay rent monthly, rather than quarterly. The IP needs to know this to understand how you pay your rent. Submission of deeds etc. by the landlord can be a hassle, so be as helpful as you can to the IP when it is in their interest to do so, for example by providing copies of missing letters or deeds.

The IP may be looking to sell the property, so check what your lease says about you having to allow your landlord to show people around and whether your landlord can put up a “for sale” sign. If signs are allowed, check to see if you benefit from any terms in your lease that say your own signage must not be obscured by sales boards (particularly important if you’re in a retail store). Make sure the IP complies with any obligations to give advance notice before showing people around and adheres to any time restrictions on when they can do so.

Is your rental deposit at risk?

If you paid a rental deposit, how secure it is will depend on how well it was set up and documented in the first place.

If the money was simply paid to your landlord, then there is a danger that it will be dragged along with any other money held by your landlord and become subject to the claims of your landlord’s creditors.

To avoid this, when the rental deposit is established, make sure it is paid into an account separate from the landlord’s other funds so that it is easily identifiable in the future.

You must also sign a rental deposit deed with your landlord when the deposit is paid. The deed must detail the circumstances in which your landlord would be entitled to withdraw the deposit money and must also say that the deposit money is in trust by your landlord or that the money belongs to you but is collected from your landlord. lessor. This will prevent your landlord’s creditors from being able to claim the money themselves.

What about service charges and sinking funds?

These payments have a higher potential risk. It depends on how well your lease was negotiated and drafted. You are just another unsecured creditor, unless the money is held in trust. The RICS Service Charges Code of Practice recommends that sinking funds be held in trust for the occupants and separate from the owner’s own money.

What if everything stops? Can/should you step in and do what the owner should be doing?

Check with the IP that the property is still secured. If not, you may need to consider insuring the property yourself. However, this could be problematic as you need to avoid any double insurance and you may not be able to recover the cost of insurance from anyone else (for example, other renters).

When your lease is for only part of the property, if the common parts are not properly maintained, you may want to consider doing it yourself or together with the other tenants, but you must be careful not to breach anything in your lease. lease. obligations You will need to get the IP’s permission to do this and it is unlikely that you will be able to recover costs from someone else. In these circumstances, try to open a dialogue between yourself, the other tenants, and the IP.

You may be able to claim damages if you suffer a loss, or offset rent payments, but you should seek specialist advice before contemplating these actions, as much will depend on the type of insolvency that applies to your landlord.

The IP may be an administrator or trustee or, ultimately, a trustee or (if the landlord is an individual) a trustee in bankruptcy. Alternatively, the landlord could be entering into some type of voluntary agreement with his creditors. A discussion of the different types of bankruptcy administrators is beyond the scope of this article.

Will your lease survive?

It is highly unlikely that your lease will contain provisions that allow it to be terminated if the landlord becomes insolvent.

Assuming the property has value and a good stream of income (your rent), the goal of IP will usually be to continue your landlord’s business in some way or to sell the property with the benefit of your lease. In those circumstances, the IP will want to maintain a good relationship with you and any other tenants. If all goes well, it should have little effect on you.

On the other hand, if the property is not economically viable and is effectively a liability rather than an asset, then if your landlord is bankrupt or in liquidation, there is a danger that your landlord’s interest will be forfeited. This is where things can get complicated and where your continued occupancy of the property may be in jeopardy.

If there is a risk of that happening, you should seek specialist legal advice. A discussion of the disclaimer would take too long in an article like this, but briefly, the possibilities are:

• If your landlord owns the property outright, and they refuse, it goes back to the Crown and the Crown accepts no lease obligations if this happens (I’m doing a separate post on this next week, something I’m looking forward to!).
• If his landlord’s interest is to lease and the IP gives up his landlord’s lease, his own lease would also be gone. Then you may be able to apply to the court for an adjudication order granting you the landlord’s lease (the rules are quite complex). But, the new lease would be on the same terms as the landlord’s old lease, not your old lease, which may not be what you want if you only have a lease on part of your property. lessor.

You might also have a hard time if your lease is a sublease. If your landlord’s lease (the master lease) allows your landlord (the superior lessor) to terminate (lose) the master lease when your landlord goes bankrupt, then the loss of the master lease would also end your lease. lease. However, all is not necessarily lost, as you may be able to get relief from court forfeiture. Another rather complex process outside the scope of this article!

Alternatively, when you are a subtenant and the landlord is behind on the main lease, the superior landlord could send you a notice requiring you to pay rent directly to the superior landlord until those arrears are covered. Again, seek advice and check the validity of the notice. It is a cheap and quick way for the superior landlord to keep some income, but it creates a new landlord-tenant relationship between the superior landlord and you.

What happens if your landlord goes bankrupt while you are renewing your lease?

It can be very inconvenient if your landlord objects to renewing your lease and then goes to management.

You cannot take the renewal of the lease to court without obtaining the consent of the IP (in this case, the manager) or the permission of the court. In deciding what to do, the court must strike a balance between the IP’s rights to manage in accordance with its objectives and its right to have its application heard and granted a new lease. There has been some recent case law on this, but clearly it is something you would need to get specialist advice on.

As you can see, your landlord’s bankruptcy can lead to a number of different outcomes depending on the circumstances. It can be simple and have little effect, or it can set off a sequence of events over which you have little or no control.

Therefore, it is advisable to be aware of the possible implications of your landlord’s insolvency and to seek legal advice at an early stage.