High Street Closures – impact on Landlords
There has been a surge in the number of high street retailers who have faced serious financial difficulties in 2018, with big names such as House of Fraser, Toys R Us and Coast struggling to survive. A recent report prepared by PwC revealed that, on average, 14 shops on the high street are closing every day and that 2,692 shops closed in the UK in the first half of 2018.
There are a number of different types of insolvency that can be employed when an individual or company experiences financial difficulties. These are as follows:
- Individual Voluntary Arrangement (IVA)
- Company Voluntary Arrangement (CVA)
- Compulsory Liquidation
- Creditors’ Voluntary Liquidation
Where there is a liquidation or bankruptcy, an officeholder is appointed to manage the affairs of the business in order to discharge its debts and liabilities. This officeholder has the right to disclaim ‘onerous property’. A lease is classed as ‘onerous property’ due to the obligation it places on a tenant to pay rent and perform covenants. If the lease is disclaimed, the tenant’s rights, interests and obligations under the lease come to an end. However, it is important to note that the disclaimer does not automatically end third party liabilities and obligations under the lease.
If a lease is disclaimed, a landlord must think carefully about what to do next. The landlord is under no obligation to take back possession of the property. In fact, if he does take back possession (which can be signified by simply accepting the keys and securing the property) any third party liabilities and obligations will immediately come to an end.
If the landlord does not take back possession of the property, the following third parties can be called upon to pay the rent and observe the tenant’s covenants under the disclaimed lease:
- The original tenant of an assigned lease entered into on or before 1 January 1996;
- The former tenant of the lease who has entered into an Authorised Guarantee Agreement with the landlord;
- A guarantor.
The landlord should consider the following options:
- Demand that a guarantor or former tenant under an Authorised Guarantee Agreement pays the ongoing rent and complies with the lease covenants. These obligations will continue until the lease term expires or is terminated.
- Forfeit the lease and try to re-let the property. This may not be an attractive proposition for the landlord during times of economic recession.
- Apply for a vesting order in respect of any sub-tenant or mortgage (if any).
- Consider making a claim for compensation in the insolvency proceedings.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.