Commercial landlords are “left in the lurch” as more business tenants go bust

The worst fears of a commercial landlord are realised when the flow on quarterly or monthly rent payments starts to dry up! Read on to find out what to do if you’re faced with this.

According to the latest available Office of National Statistics (ONS) figures, the number of company insolvencies in England and Wales reached a 13-year high in the first half of this year and there’s been no sign of the trend abating since.

Total company insolvencies (5,629) in England and Wales in the second quarter of 2022 reached their highest quarterly level since Quarter 3 2009, driven by companies going in to voluntary liquidation.

Covid support gone

Government support during Covid meant that insolvencies had decreased in 2020, when average quarterly insolvencies in the early part of 2020 were slightly down on the 2015 to 2019 average, but in August 2022 more than 10 per cent of UK businesses reported a moderate-to-severe risk of insolvency.

Most reported energy prices as their main concern. Soaring energy costs and materials prices, consumers tightening their belts and lost orders are leading on a slippery slope into a recession, forcing a record number of firms out of business.

Construction, manufacturing, accommodation and food services, wholesale and retail trade industries together accounted for over half the total business insolvencies in the first half of 2022, and the rate that companies are going bust is nearly 50 per cent higher than the average over the four years before the pandemic.

Small firms with less than 50 staff are the most likely to face insolvency according to the ONS, with a moderate-to-severe risk of insolvency in that sector. A weakening economic outlook and the prospect of increasing energy costs as government support is lifted going into 2023 is weighing on companies’ futures.

Most of the businesses in the above sectors were heavily affected during the pandemic. A combination of cash flow issues, the removal of government Covid support, plus the surge in energy prices following the Ukraine war, have accelerated falling business confidence.

With more hardship in the pipeline as consumers tighten their belts, there’s likely to be something of a cliff edge following the Christmas spending spree, as economic experts predict it is likely to get worse before it gets better.

What can landlords do when faced with tenants going bust?

Usually the first sign of trouble is missed rent payments, tenants asking for more time to pay, the bank rejecting cheques or cancelling standing order payments.

In these situations tenants are usually inventive in the excuses they come up with but landlords need to be on their guard and need to get to the bottom of what’s happening quickly.

Being aware of the importance of monitoring rent payments means that you can at an early stage try to develop a communications channel with your tenant to establish the true position.

Whilst doing this, a visit to the premises should give you the opportunity to observe what’s happening: is there to usual level of activity in the firm?, whether that’s reduced footfall in a retail business or piling up inventory and finished goods in a manufacturing business, when orders are being cancelled or delayed, the signs will be there if you’re observant.

Other obvious signs to look out for are those shouting out to you, about stock clearances, massive reductions and perhaps even closing down sales, all literally giveaway signs that trouble is looming. If this is unusual activity for the business concerned then the signs are definitely on the wall and in a hostile economic environment like this its important that you quickly get to the bottom of what’s happening with your tenant.

Search the bankruptcy and insolvency register

Don’t panic

It’s important not to panic and make matters worse. Threats will only close the communication channel between you and your tenant so you should approach the issue in a spirit of support, cooperation and professionalism.

If your tenant is open and honest about its situation then perhaps there’s something you can work out together. Losing a tenant can often mean a long void period where the landlord becomes liable for payments, plus you have the cost and expense of marketing the property and signing up a new lease.

Vacant commercial premises costs can be considerable, turning an income producing asset into a liability. After 3 months vacant (unless a listed building or a low rateable value) the landlord becomes liable for the full cost of business rates, insurance at vacancy rates (often double the rate when occupied), repairs costs fall back on the landlord (if this was a full insuring and repairing lease), there’s likely to be a cost for increasing security and utilities standing charges will by payable.

Even if rent payments are considerably reduced or fail altogether it is often better to sit tight and let the tenant take the responsibility for all these costs, as long as they are on a lease commitment. It may be that the business can survive on that basis and normal serve can resume eventually.

When all else fails

If the tenant does go bust you need to quickly establish what kind of insolvency process the tenant is going down: voluntary liquidation, administration, compulsory liquidation, receivership or a voluntary arrangement.

This is likely to be a very difficult time for your tenants as well as yourself, so try to approach the issue with professionalism and sensitivity. You are likely to be the one in the better financial position after all, so you can afford to be sympathetic, but you still need to protect your own interests.

Try to find out quickly who is dealing with the matter; is it an administrator, a liquidator, a receiver, or is it your tenants themselves who are making arrangements? Making contact is important with whoever it is is important and cooperation on both sides can only help.

You rent payments

In the case of administration you need to speak with the administrators as soon as possible as you may be asked to cancel the rent payments altogether or reduce them in an attempt to allow the business can continue trading, or facilitate a sale as a going concern, or a winding up.

But in all the other circumstances, you are still in your rights to demand rent to be paid as long as the lease remains current and the business is still using your premises. That doesn’t mean you will get paid if the tenant is already in arrears – very likely.

Unfortunately, if the company is already in receivership, any secured creditors such as banks and finance companies will take priority with payouts from remaining assets. Landlords are unsecured creditors so you will join the pool of all the other creditors such as supplies to to what’s left, if anything.

The administrator’s or liquidator’s fees come second in line for payouts, including their expenses the the preferred creditors will come next including employees of the company, and since 1st December 2020, HMRC is also ranked as secondary preferential creditors.

Regaining possession

In view of what’s been said above, and unless you have another tenant lined up, or you know the property will re-let easily, you should be in no rush to retake possession. When you do you take on the responsibility of all the vacant costs.

You know, or you should do by now, that you will eventually regain possession without further action on your part, so going down the road of forfeiture proceedings will be unlikely to be necessary. There may be a chance the administrator can sell the business as a going concern, in which case a new tenant will take over the existing lease.

In the absence of this happy scenario, you can look to start marketing the premises at the earliest opportunity to try to minimise your losses.