March 2009: Dealing with insolvent tenants

Dealing with an insolvent tenant can be a minefield for landlords especially as the options open to the landlord depend on the type of insolvency. In this article, we give a few tips on what you can do to protect your position in relation to insolvent tenants who are individuals or sole traders; a future article will deal with insolvent company tenants.

The two types of insolvency scenario in relation to individual tenants are bankruptcy and Individual Voluntary Arrangements (IVAs).

Liability for payment of rent
If a tenant is declared bankrupt, they no longer control their finances, which are taken over by someone called a ‘trustee in bankruptcy’. The trustee then becomes liable to pay the rent under the lease and so, often, they will bring the lease to an end early, a procedure called ‘disclaiming the lease’ as described below.

In the case of an IVA, the supervisor is not personally liable for payment of the rent so, if an IVA goes through, there is little you can do.

Remedies against the tenant
In relation to a bankrupt tenant, a landlord can only sue the tenant before a bankruptcy order is made. However, the courts will often stop the proceedings once bankruptcy is started and so it is often unwise to do this.

A landlord has the same right as any other creditor of the tenant’s to vote in and challenge an IVA. All the rent arrears and all rent due for the rest of the term are included as the debt for the purposes of the vote. To proceed, an IVA needs the support of 75% of the creditors by value of their debt and so this can often put a landlord in a strong position to oppose an IVA, should he wish to do so. Even if the IVA is passed, if the tenant defaults on its terms, then the landlord once again enjoys all its normal rights to recover rent arrears.

Other remedies
If another creditor of the tenant has already sent in bailiffs to seize goods at the premises, the landlord can recover up to 1 year’s rent from that creditor. Notice of this claim has to be given to the bailiff before any bankruptcy order is made, however, otherwise the claim is limited to 6 months’ arrears.

If the premises have been sublet by the insolvent tenant then, in the case of either bankruptcy or an IVA, the office holder (the trustee in bankruptcy or the supervisor of the IVA) is not under an obligation to pay the rent received from the subtenant to the landlord. The solution for the landlord is to serve notice on the subtenant, requiring the subtenant to pay rent directly to the landlord. This right is due to be abolished so enjoy it while you can!

Disclaiming the lease
Disclaimer is a procedure available in bankruptcy by which the tenant’s trustee in bankruptcy can bring the lease (and therefore the tenant’s continuing obligations under the lease) to an end.

If the trustee in bankruptcy disclaims the lease, it is backdated to the date the trustee was appointed. This can be particularly frustrating if the trustee takes a long time to decide whether to disclaim. The landlord does have the right, however, to give the trustee 28 days’ notice to decide whether or not to disclaim the lease and, if he doesn’t disclaim with this period, the right to disclaim is lost.

In an IVA situation, the supervisor does not have the right to disclaim the lease.

Handling insolvent tenants
As you can probably gather, these are complex legal issues. If your tenant enters into any kind of insolvency arrangement the chances of getting paid rest with the insolvency office holders and insolvency law, so do take expert legal advice in these circumstances.

Contact Cousins Business Law on 0845 003 5639 for more information.

While our Government here in the UK continues to make more and more new laws, there are some pieces of out-of-date legislation that we think need their attention:

• It is an act of treason to place a postage stamp bearing the British monarch upside down.
• In Lancashire, it is an offence for a person to incite a dog to bark after being asked to stop by a police officer on the seashore.
• Royal Navy ships that enter the Port of London must provide a barrel of rum to the Constable of the Tower of London.
• In England, all men over the age of 14 must carry out two hours of longbow practice every day.
• In Chester, Welshmen are banned from entering the city before sunrise and from staying after sunset.
• In York, it is perfectly legal to kill a Scotsman within the ancient city walls, but only if he is carrying a bow and arrow.
• In the UK, it is lawful for a man to urinate in public as long as he aims for the rear wheel of his vehicle and keeps his right hand on it (the vehicle that is).

And there are more; maybe one day the government will get around to removing them from the statute books.

The Court Service has, for a number of years now, been changing court documents so that they are written in plain English and readily understandable by a non-lawyer. Such documents are usually accompanied by a sheet explaining exactly what you should do if you receive one.

However, documents relating to company insolvency proceedings have, for no obvious reason, been left out of this process. Unfortunately, this means that it is often not clear what you should do if you receive a statutory demand or a winding-up petition.

There’s a detailed article on statutory demands and winding up petitions on the Cousins Business Law website but in summary:

• If you receive a statutory demand, act quickly. If you have a dispute, take immediate legal advice; any court application must be made within 21 days.
• If you receive a winding-up petition, act quickly. If you have a dispute, take immediate legal advice; any court application must be made within 7 business days.
• If your bank has frozen your account, act quickly. Whether you settle the debt or have a dispute, take immediate legal advice so that you can apply for a validation order.

And, if you are a creditor, the winding-up procedure is a particularly effective weapon as it comes with the threat of freezing a debtor’s bank account. Take legal advice from a suitably qualified business lawyer about whether it will be suitable for your situation.

If you are in receipt of a statutory demand or winding-up petition and want to know what options are open to you contact Cousins Business Law on 0845 003 5639.

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