Settling the tab

After a historic general election, the UK has a coalition government for the first time since the Second World War. As the country gets to grips with this unusual situation, the focus for the respective leaders of the parties is to achieve a balance in policies that will allow that Government to reduce the deficit and achieve a full economic recovery for the UK.  
For businesses within the property industry, a sector that has felt the full force of the recession, the new premiership may offer a glimmer of hope. Companies and in particular commercial landlords will look anxiously to Parliament to see what measures will be introduced to reduce business failure and help them achieve full revenue from their properties. However, just as some of the help will hopefully come from Government intervention, the question is whether there are any steps that commercial landlords and indeed landlords generally need to take to ensure the survival of their own business and maximum realisations in what will continue to be a difficult market for many months and possibly years to come.

The basic principles of good business have remained the same as they ever were; good cash flow, chasing debts and taking action immediately if the tell tale warning signs appear. During the past couple of years, property businesses have learned that bad debt cannot be ignored. Continual default and non-payment of rents and service charges are inevitably the final nails in the coffin that will finish off a struggling business if every effort is not made to deal with the problem quickly. The question is whether to allow a tenant to miss quarter date payments and try to reduce the increasing arrear over a period of time or alternatively go in hard and pursue the debt by methods other than the normal recovery procedures through the Court. As with the balance now required by the new coalition government, a similar balance must to be achieved by the landlord is deciding what action to take. It is extremely important to realise that one approach does not suit all and that adopting an approach that has been successful in one given scenario does not guarantee success when applied to another completely different set of circumstances.

Many companies within the property sector have been reluctant to consider chasing debt by the threat and presentation of winding-up and bankruptcy petitions to the court. The number of winding-up petitions and bankruptcy proceedings issued has not increased as much as was expected by those in the debt recovery industry. Generally there appears to have been a reluctance to follow this path due to a belief that the debtor is more or less insolvent and therefore will either place itself into insolvency or another creditor will do so. Some creditors appear to have adopted a “wait and see” policy. The danger is clear. What is certain is that whilst a creditor waits, it is extremely unlikely to be paid by the debtor on a voluntary basis. A debtor will always direct its available funds to those creditors who are pressing the hardest and who may offer the biggest threat to the survival of the business if the debt is not addressed.

During 2009, a number of high-profile organisations fell foul to winding-up orders and administrations. In many of these cases, the unsecured creditors stand to recover little or no recovery of their debts. If a landlord is faced with an insolvent tenant the situation is compounded by the possibility that not only will current arrears become an unsecured claim within the liquidation, but the liquidator is also likely to disclaim the lease leaving the landlord with an empty property and little or no prospect of filling it in the foreseeable future.

Why then would a landlord consider threatening a tenant with winding up or bankruptcy proceedings when the resulting order may be catastrophic for the landlords business? The answer is that the purpose of the threat and later issue and service of a petition is not to obtain the order but to advance the landlords claim to the front of any other creditors. If the tenant business has funds available then they should be allocated in the direction of the landlord and the current exposure to arrears kept to a minimum.

The second reason is that it is usually beneficial to find out exactly what the tenant’s ability to pay arrears and future rent are as soon as possible. If a tenant appears in financial difficulty and has not been able to respond positively to the threat or issue of insolvency proceedings then it is likely that the business was going to fail in any event. By establishing these facts early the landlord can seek to take steps to try to mitigate its situation by trying to line up new tenants. If the tenant is threatened with winding up or bankruptcy it may seek another insolvency procedure option such as entering into an IVA or CVA (personal or company voluntary arrangements) with its creditors. Providing the business has strong future orders any only current cash flow difficulties, these procedures that the debtor company is forced to consider early may be beneficial to a landlord.

Again, the threat or issue of a winding up petition may result in the tenant seeking an Administration Order. In some circumstances this may in turn see the assignment of the lease and continuation of the payment of rent to a new business but in any event payment of existing rent from the date of the administration to the date the administrator leave the premises (as an expense of the administration). This has recently been extended under case law to include the end of the quarter even if the administrator has vacated months beforehand.   

It should go without saying that a lease should have a surety. If the tenant who has accepted primary liability under the lease is insolvent and unable to meet its obligations, the decision of how to proceed in any given matter can be helped by up to date knowledge of the guarantor’s ability to meet the obligations in the even the tenant cannot.

It is essential therefore to ensure that before pursuing an aggressive approach to recovery, the guarantors, who may be a parent company or individual directors of the tenant, appreciate that if the matter proceeds as threatened, any resulting unsatisfied liability will fall on them. It is also essential not to seek to rely upon the historic data about the guarantor and their ability to be able to pay. The reality is that the recession may have hit the guarantor as well as the tenant. If the pursuit of a particular recovery strategy is to result in the anticipated calling in of guarantees and recovery action against guarantors, an idea of their current financial position is always wise.  

If it is established that a guarantor is asset rich and capable of discharging any liability under a lease, the aggressive action by a landlord in threatening and issuing insolvency proceedings to recover rent should cause them concern. Again if they have any control over the activities of the tenant, this fact should help advance the landlords claim to the front of any queue. The guarantor should also realise that the threat and pursuit of insolvency proceedings in the absence of payment will not stop with the action against the tenant. 

In conclusion, the threat and issue of insolvency proceedings against a debtor is draconian and should only be considered if the particular circumstances of the matter points to this being an appropriate and necessary action. Generally landlords will want to avoid insolvent tenants, yet can prove beneficial for a landlord to threaten a defaulting tenant. Careful consideration of all the factors of the situation should be discussed with the landlords professional advisor before this road is taken.