If you are the landlord of a commercial property which has been left in an unacceptable state of repair by a tenant who has entered liquidation or administration, then it will be important for you to swiftly establish how any claim for dilapidations will be affected.
As Sanjay Chandarana, commercial dispute resolution solicitor and partner at Ingram Winter Green, explains ‘Your position will depend on a range of factors, including whether you have a rent deposit or tenant guarantor in place, and also on whether any aspect of disrepair can be attributed to decisions made, or directions given, by the appointed insolvency practitioner.’
Legal advice should be sought promptly and preferably before you take any steps that could prejudice your position.
In order to determine where you stand, legal advice should be sought promptly and preferably before you take any steps that could prejudice your position. This is particularly important where the circumstances of your case mean that it might be possible for you to get your claim paid in full, provided you adopt the right strategy.
Starting position
It is ordinarily the case that a landlord intending to claim for dilapidations against an insolvent tenant will have to do so as an unsecured creditor. That is not ideal as the prospects of you recovering what is owed are likely to be low, given the probability that there will be many other creditors to whom money is due and whose debts will rank in priority to yours. These include the holders of fixed charges, preferential creditors such as HMRC, creditors who are owed money which can be categorised as an insolvency expense and even the insolvency practitioners themselves given that they will need to be paid for their services.
To improve your chances of making a good recovery in respect of your dilapidations claim, you will need to get yourself promoted up the priority list or alternatively to try to claim what is owed from someone else.
Position where there is a rent deposit
One way of improving your priority ranking is where you have a rent deposit deed which has been structured as a charge. In that scenario, you will be elevated to the position of a secured creditor in respect of the monies that are held. This could work to your advantage where the terms of the deed permit the deposit to be utilised to cover dilapidations, and either there are:
- no outstanding rent arrears or other significant liabilities that need to be paid out of the deposit fund; or
- any outstanding rent arrears that exist can be classed as an insolvency expense which fall to be settled by the liquidator or administrator separately, and without resorting to the deposit.
In summary, rent will generally be recoverable as an insolvency expense where the previously tenanted premises continue to be used by the liquidator or administrator for a purpose that is likely to be beneficial to the insolvency process, for example in order to increase the chances of the insolvent tenant’s business being sold as a going concern. In these circumstances there will be no need for the deposit to be used to settle any arrears that exist, which means that the funds available can instead be used to settle other claims. Please see our blog on ‘A landlord’s right to recover rent as an insolvency expense’ for further information.
The status of deposits and the purposes for which they can be used can often be a bone of contention in insolvency scenarios and for this reason it is always best to seek legal advice.
Where the rent deposit has been structured as a trust, there is a risk that use of the deposit monies to settle your dilapidations claim will not be an option as it is common for this to be claimed by the liquidator or administrator as something which belongs to the insolvent Tenant’s estate. That said, it may be possible for you to resist such an assertion where the circumstances of your case mean that you have grounds to argue equitable set off.
As Sanjay Chandarana notes ‘the status of deposits and the purposes for which they can be used can often be a bone of contention in insolvency scenarios and for this reason it is always best to seek legal advice. This is particularly true where there is uncertainly around whether a deposit has been structured as a charge and whether it can be categorised as a financial collateral agreement which entitles you to access the deposit funds without first seeking the consent of the liquidator or administrator, or else obtaining prior permission from the court.’
Position where disrepair is attributable to the liquidator or administrator
Another way in which you might be able to rise up the priority list is where some or all of the damage that has been caused to your premises, and which therefore forms of the basis of your dilapidations claim, has been caused by the carrying out of some form of action which has been taken at the liquidator or administrator’s request and which can therefore also be classed as an insolvency expense. This might be the case where a direction has been given for the removal of fixed furniture or equipment to enable them to be sold and in the process of the removal of these items the fabric or internal decoration of your premises has been harmed.
Position where there is a guarantor
Where performance of the tenant’s obligations under the lease have been guaranteed by a third party, it may be possible for you to pass on liability for the dilapidations claim to the guarantor and even to compel them to take on a new lease of the premises.
However, your rights against a guarantor will depend on the terms of the guarantee arrangement and on you not having done anything which might be construed as absolving the guarantor from liability, such as agreeing to a lease variation without their consent or re-entering the premises in a manner which effectively terminates the lease.
Note that in this regard where a liquidator or administrator elects to disclaim a lease following their appointment, your rights of recourse against a guarantor will not generally be affected.
Need more detail?
For further information on your options as a landlord when a tenant collapses into insolvency, please contact Sanjay Chandarana on 020 7845 7400 or via email at sanjaychandarana@iwg.co.uk.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.