With retail store closures again making the headlines, Mark Kelly an Investment Property Management surveyor at Colliers International, says that a prompt and pragmatic property management programme could help soften the blow for landlords - even if a tenant enters administration.
He commented: “Once a tenant is in administration, there is little a landlord can do. The law protects the tenant, so landlords cannot retake possession, take action to recover arrears or force correction of any repairing breaches.
“However, all is not lost and there are in fact ways by which landlords can reduce their losses, but a detailed and up to date knowledge of the property is an essential requirement.”
Know your lease terms
As unsecured creditors, only rent that falls due for payment in the period of administration, where the property continues to be used, will be payable as a priority. This is why most administrations are announced shortly after a quarter day as the effect is that tenants can trade up to the next rental period with no liability to pay rent.
“Whilst many landlords are not in favour of switching to monthly rents, taking such a flexible approach could actually help during an administration as the tenant will only be able to remain in occupation for a few weeks before further rent becomes due”.
Know your occupier
Where rent falls into arrears and there is a subtenant, landlords can use the Law of Distress (Amendment) Act 1908 to arrange for the sub rent to be paid direct to them. However any notices served under the act must be served promptly and correctly each time payment falls due.
Furthermore, where there is a sub tenant and the outcome of the administration is liquidation, then the lease could be disclaimed meaning any sublease rights and liabilities may be effectively extinguished. Although a subtenant may apply to court to remain in occupation, they may not choose to do so where the terms are highly onerous.
“To avoid the subtenant leaving or asking to negotiate market terms direct, agreeing a surrender of the head lease with the administrator prior to liquidation will keep the original sub tenancy alive, beneficial where the rent under the sub tenancy is higher than the market rent”.
Know the past
It is also important to know whether the lease is an "old" or a "new" lease for the purposes of the Landlord and Tenant (Covenants) Act 1995. This determines whether previous tenants are liable for the rent if the existing tenant fails. Alternatively, are there any guarantors still liable? Whatever the type of lease, any notices served on previous tenants or guarantors must again be served promptly and correctly.
Mark concluded: “Unfortunately for landlords, tenant administrations are largely unavoidable, but by knowing your building, occupier and lease terms inside out, it could be possible to recover more than expected during a tenant administration. Property management is often seen as a poor relation; however a prompt and pragmatic approach can offer real benefit to landlords during times where all seems lost.”