Landlords' Remedies For Tenant/Guarantor Insolvency (A Short Case Study)

A case study of what to look out for when a tenant or its guarantor is looking like it is heading for financial difficulties

As a prudent and prepared landlord, it's always sensible to assess what potential remedies you might have should a tenant (or its guarantor) become insolvent or enter into some form of insolvency procedure. In this bulletin, we look at a short hypothetical case study and identify some of the key issues that landlords will need to assess in such circumstances.

1. The case study scenario

The case study facts are as follows:

We have an original tenant that is an English Special Purpose Vehicle (the Tenant), established for the purposes of taking a lease dated 1 April 2016 (the Lease). The Tenant itself does not have any substantial assets. In contrast, the Tenant's obligations under the Lease are guaranteed by its parent company, a US entity (the Guarantor). The written guarantee is in a separate agreement to the Lease. The Tenant uses the premises for a mixture of: Sublet space to a single third party; and Serviced office space where temporary occupation by customers is under short, written licence agreements. It now appears the Guarantor and its group companies are in financial difficulties. 2. What happens if the Tenant becomes insolvent?

... and what is meant by "insolvency" and how might it be spotted?

This means that the Tenant is unable to pay its debts as they fall due. There may be arrears of rent. It may be that the Tenant company gives indications of having difficulties, for example by requesting that it pays rent monthly. There may be press speculation. Alternatively, the first indication may come from the Tenant entering into a formal state of insolvency, for example an administration or possibly a liquidation, or it may propose a CVA, which is a binding arrangement between it and its creditors (if 75% of creditors vote in favour).

Steps to take

Check your rights under the Lease: do you want to take the premises back e.g. exercise rights to forfeit the Lease if the Tenant is in breach? You may need to stop communicating with the Tenant and act quickly, subject to any grace periods in the Lease, to forfeit the Lease so as to prevent risk of waiver of the right to forfeit. Do you want to agree to any kind of concession, e.g. monthly rent, or even a rent reduction (N.B. taking care not to discharge the Guarantor by agreeing variations without the Guarantor being a party to the variation). Also, a concession...