- What are the options for commercial landlords when a tenant becomes insolvent?
What are the options for commercial landlords when a tenant becomes insolvent?
What are the options for commercial landlords when a tenant becomes insolvent?15th January 2021 - Published by Kuits Restructuring & Insolvency team
The devastating fallout of the ongoing COVID-19 pandemic has left more companies than ever facing insolvency. In the world of commercial property where these companies are tenants, many landlords now find themselves unsure of the effect this has on their property, the rights they have in relation to the lease and the obligations they have in respect of the property.
The options available to landlords following tenant dissolution are limited, and landlords are advised to tread carefully.
As in section 1012 of the Companies Act 2006, when a tenant company is dissolved, their interest in the lease will, subject to any prior arrangements to the contrary, automatically become vested in the Crown as Bona Vacantia. Once in the Crown’s control, the lease can either be disclaimed by the Crown or sold for full market value.
Disclaimer of a lease by the Crown means that the interest is treated as never having passed to the Crown. Although there is no guarantee a lease will be disclaimed, the Bona Vacantia Division (BVD) of the Treasury Solicitor’s policy is generally to always disclaim commercial leases as they have no value.
This has always given landlords certainty in property management: should they make an application to the BVD for the lease to be disclaimed, all of the tenants’ rights and obligations in respect of the lease will have been extinguished and they would be able to re-let. In doing this landlords would need to be cautious about the risks, for example becoming liable to pay empty rates to the local authority.
In the case of Re Buzzlines Coaches Ltd  EWHC 3027 (Ch), a lender advanced funds to a tenant company which went into liquidation and was subsequently dissolved; the tenant company was struck off the Register of Companies and dissolved in January 2020.
As a consequence of this, the tenant’s rights in the lease passed to the Crown. In May 2020, the Treasury Solicitor served notice of disclaimer on the lender. The lender promptly issued a claim for a declaration that it remained entitled to the legal mortgage of the leasehold property and applied to court to restore the tenant to the register for these purposes. However, at the same time a former director of the tenant restored the tenant to the Register using a simpler administrative restoration procedure not available to the lender.
The Judge granted the declaration and confirmed that the disclaimer did not extinguish the rights and liabilities of third parties, such as the lender.
It is relatively rare to see a company restored following a dissolution and a disclaimer by the Crown, so the judge was faced with a difficult question of the effects in this case. The judge held that the leasehold title was re-vested in the company when it was restored. In this case, the lender had taken steps to protect its position within the statutory time limit and so the “harm” caused to third parties was limited.
The above case throws landlords and their prospective tenants into a precarious position, in times that are already uncertain.
Landlords should be cautious when dealing with the property of dissolved tenants and ensure transparency with their successors as subsequent transactions could be subject the rights of third parties.
Should an application for restoration to the Companies Register be made following their dissolution, case law confirms that the lease also returns, although certain third parties may enjoy protection. In these situations, the affected parties should seek urgent advice as to their position so as to ensure they are protected.
In most situations where the company has gone into liquidation before dissolution, the liquidator of the company would use their powers of disclaimer under the Insolvency Act 1986; disclaimer by a liquidator would not be affected by subsequent restoration of the tenant to the register of companies.
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With the medium-term economic fallout of the COVID-19 Pandemic and structural changes rendered by Brexit, it is anticipated that the numbers of companies affected by corporate insolvency will increase in 2021, so these issues may become more common over the year.