Crunchtime

It is almost impossible to pick up a newspaper without being reminded of the difficulties being faced on the high street. It is likely that the effects of the recession will continue to be felt particularly keenly in the commercial property sector, with tenants struggling to pay or becoming insolvent. 2009 looks set to be a year when the consequences work their way through the courts. It seems timely therefore to flag some of the issues for those advising in this area and to look at one of the first cases arising out of the recession to reach the Court of Appeal.

Remedies against the tenant

Possible remedies (depending on the circumstances) include distress for rent, suing for arrears, forfeiture whether by service of proceedings or peaceable re-entry, resort to rent deposit (depending on terms of rent deposit deed); and serving notice to require an under-lessee to pay direct.

Part 3 of the Tribunals Courts and Enforcement Act 2007 contains provisions prospectively abolishing the common law right to distrain and replaces it with a new statutory procedure called the commercial rent arrears recovery (CRAR) procedure. Part 3 is not yet in force and the likely commencement date is unknown '“ therefore for now distress remains a remedy at common law.

When Part 3 does come into force, distress will be replaced by the CRAR procedure which enables a landlord (through a certified enforcement agent) to seize goods only where a notice procedure has been complied with and where the arrears exceed certain limits. Although CRAR is arguably a more civilised remedy than distress, a criticism from a landlord's perspective is that it will (by definition) notify the tenant that an agent will be attending the premises thereby affording the tenant an opportunity to hide/remove its goods.

Remedies against third parties

Where the tenant fails to pay, guarantors and former tenants (and, if appropriate, their guarantors) are possible additional targets under the lease in question.

Any remedy against such third parties in respect of future rent/obligations is dependent upon the continuation of the lease. It would therefore be prudent to avoid any conduct that could be construed as an acceptance of a surrender.

As regards pursuing former tenants/their guarantors the Landlord and Tenant Act 1995 (1995 Act) draws a distinction between 'old tenancies' (pre- 1 January 1996) and 'new tenancies' (on/after 1 January 1996). For old tenancies, the former common law position holds: the original tenant is severally liable in addition to the existing tenant for arrears falling due post assignment. So too are any intermediate assignees if (as often) they have entered into a direct covenant with the landlord to abide by the covenants in the lease.

As regards new tenancies, a former tenant will not be liable for arrears accruing post-assignment unless it has entered into an Authorised Guarantee Agreement (AGA) as often required by the landlord at the time of the assignment. The 1995 Act provides, however, that a former tenant cannot be liable following a subsequent assignment (i.e by its own assignee) as regards sums falling due after that second assignment.

For both 'new' and 'old' tenancies, the time-barring effect of s.17 of the 1995 Act should be noted. The landlord needs to serve notice on the former tenant (or that tenant's guarantor) against whom a claim is to be made. The notice must be served within six months of any fixed sum, in relation to which a claim is being made, becoming due. The third party has a right to call for an overriding lease (i.e a lease interposing the third party between the existing landlord and tenant), so it is necessary to consider whether the landlord is prepared to have the third party as a tenant if pursuing this course.

Unfortunately for landlords the position is often complicated by its tenant entering into administration, a voluntary arrangement or liquidation (collectively 'an insolvency process' in this article). In many respects the landlord's remedies are curtailed by statute, (similar '“ though not identical '“ restrictions apply with non-corporate tenants).

Administration will be more frequent

Administration bears particular attention. Changes to the law brought about by the Enterprise Act 2002 mean administration is likely to be encountered more frequently. Most '“ if not all '“ of the newsworthy corporate failures thus far have proceeded by administration.

Once in administration, the company benefits from a statutory moratorium from claims. The aim is to give the company 'breathing space' to pursue the purpose of the administration. The possible aims of an administration are set out in the Insolvency Act 1986, sched.B1, para.3. These are: rescuing the company as a going concern, achieving a better result for the creditors than would occur on a winding up (without a prior administration), or realising property in order to make a distribution to one or more secured or preferential creditors.

As a result of the moratorium, the landlord cannot, for example, distrain, sue for rent or forfeit the lease. A landlord will wish to know the administrators' intentions regarding the demised premises, in particular as regards future rent. Where payments are regarded as being expenses of the administration, they are paid in priority to other sums and can be paid during the administration. Where the premises are central to the purpose of the administration (for example, where the company continues to trade from the premises, or a third party is let into occupation for a purpose connected with the administration) payment of ongoing rent is likely to be regarded as such an expense.

By contrast where the demised premises are not so needed, ongoing rent is unlikely to be an expense of the administration. In the latter case the administrators may wish to surrender the premises (unlike a liquidation there is no power to disclaim; the landlord can therefore choose whether to accept such a surrender).

Innovate v Sunberry

A landlord faced with a tenant in administration can always apply to court to lift the moratorium, or seek, say, a declaration that future rent should be paid as an expense of the administration. One of the first cases from the current downturn to reach the Court of Appeal is Innovate Logistics Limited (in Administration) v Sunberry Properties Limited [2008] EWCA Civ 1261, in which the principles in play on such applications are discussed and the court confirmed earlier guidance in Re Atlantic Computer Systems Plc [1992] Ch 505.

In essence, the court conducts a balancing exercise '“ balancing the protection needed for the purpose of the administration with the landlord's proprietary rights (i.e to seek possession). In Innovate Logistics administrators of the tenant company (T) had let a third party (O) into occupation of the demised premises under an occupation licence in breach of non-alienation provisions in T's lease. As part of the arrangement O took over, and undertook to complete, T's trade contracts. This was necessary for collecting T's book debts for the benefit of its creditors. At first instance, the landlord obtained permission to commence injunction proceedings to compel the tenant company to end O's licence.

The Court of Appeal overturned the decision: the judge (whose attention had not been drawn to all evidence on the court file) had been wrong to conclude that the purpose of the administration had been fulfilled (as the book debts needed collecting) and had failed to conduct the Re Atlantic balancing exercise. A key feature was that the passing rent, which was higher than the then market rent, was being paid by the administrators to the landlord '“ albeit monthly rather than quarterly as required by the lease '“ and the balancing exercise therefore came down in favour of the general body of creditors.

The outcome indicates that where the premises are necessary for the purposes of the administration and the landlord is unlikely to be out of pocket, the moratorium is unlikely to be lifted.

Tactical/commercial issues

It is clear that landlords can find themselves in a difficult position, particularly when faced with a tenant in administration. To exacerbate the problem, most reports suggest we are in for a period of falling rents. Even if possession can be obtained against a defaulting tenant the landlord may be left with a void property, paying unoccupied premises rates (reliefs in relation to which '“ to add insult to injury '“ have recently become less favourable).

This all suggests that if an existing tenant is, historically, at all decent the landlord may be best advised to keep the relationship alive either by agreeing to re-schedule rental payments (e.g monthly rather than quarterly) or by rent concession, rather than risking the insolvency of the tenant. By the same reasoning, a savvy, or well-advised, tenant would recognise the strength of its bargaining position and consider an early approach to its landlord '“ rather than 'ostritching' '“ to try and reach an agreement if unable to meet its commitments.

Richard Hayes is a barrister at Lamb Chambers, Temple