What to do if you tenant goes in Administration

Knowing what to do when your commercial tenant goes into administration requires you to first to understand what administration means if you are not aware already.

When a company goes into administration, directors will hand over control of the business to a third party. Any liabilities that company has will also be ringfenced, which means getting the rent you are owed will involve a long time consuming process.

But what does this mean for your property? Will you be able to recover lost rent? We’ve assembled a Q and A guide on what happens when your tenant goes into administration or insolvency.

Q&A: What Happens When a Tenant Goes into Administration or Liquidation?

Q: What happens to a commercial lease if a tenant goes into administration?

A: When a tenant goes into administration, the lease doesn’t automatically end. An administrator is appointed to manage the company’s affairs, often with the aim of rescuing the business, selling its assets, or distributing funds to creditors. The lease may continue if the administrator believes the property is necessary for the company’s operations during this process. However, if the premises are no longer needed, the administrator can disclaim the lease, ending the landlord-tenant relationship.

Note: These rules are based on UK insolvency laws and practices.

Q: Can the landlord still collect rent during administration?

A: Yes, but it depends on the situation. If the property is actively used during administration, the administrator must pay rent as an administration expense. If the property isn’t used, the landlord may need to claim unpaid rent as an unsecured creditor, often receiving only a fraction of the owed amount.

Q: What happens if the lease is disclaimed?

A: If the administrator disclaims the lease, it effectively ends the tenant’s interest in the property. However, the landlord can:

• Repossess the property.
• Claim for any unpaid rent and damages as an unsecured creditor.
• Pursue any guarantors or former tenants if lease conditions allow.

Q: What if the tenant goes into liquidation instead of administration?

A: Liquidation signals the end of the business, with assets sold to repay creditors. The lease can be disclaimed by the liquidator if the property isn’t needed. As with administration, landlords become unsecured creditors for unpaid rent but can still seek payment from guarantors or former tenants if such provisions exist.

Q: Can a landlord forfeit the lease if a tenant is in administration?

A: Usually, a landlord needs court permission to forfeit the lease during administration due to a legal moratorium protecting the business. However, if the tenant goes into liquidation and the lease is disclaimed, the landlord can repossess the property without restrictions.

Q: What should a landlord do if their tenant goes into administration or liquidation?

A: Landlords should:

1. Contact the administrator or liquidator to understand intentions regarding the lease.
2. Review lease agreements for clauses related to insolvency, guarantees, and rent deposits.
3. Seek professional legal advice to navigate claims and recovery options.
4. Prepare to remarket or repurpose the property if lease termination is likely.

Understanding the processes involved can help landlords act swiftly to protect their interests when a tenant faces insolvency.

Didn’t see it coming?

The provisions of the Insolvency Act 1986 means that a landlord cannot instruct bailiffs to visit the property and seize goods to cover the debts while a tenant is in administration. Understandably this creates a big problem for landlords, particularly if they didn’t see it coming.

Fortunately, there may be one way to recover the rent owing and that is to approach the administrator and ask if they will pay the rent and include it as part of the administration process. There is a better chance of success going down this route if the administrator is occupying the property at the time.

It has to be said, however, that you will be relying on the administrator to allocate the payment during what amounts to a grace period for the business from being pursued by creditors.

If your commercial tenant has gone into administration, you can learn more about our debt recovery services here or please call one of our team on 0800 002 9049.