Property and Insolvency Briefing - November 2011

It looks like there is another hard winter ahead. With the Eurozone in crisis and UK consumer confidence at an all time low insolvency is still very much on the agenda for those in the world of property.

No sector appears untouched. Take as an example the formerly buoyant care homes sector. In late May this year the future of 750 care homes hung in the balance after the UK's biggest care home operator Southern Cross warned that it may not have enough funds to stay in business beyond June. The company came close to administration after falling occupancy rates left it unable to meet rising rental bills. Southern Cross arranged for its care homes to be transferred to landlords. This should be completed in the next few weeks ahead of a full windingup of the company, expected before the end of the year. Banks and landlords still owed money by Southern Cross are likely to be left with a shortfall as a result. Just this month Aberdeen-based Argus Care Group, a care home company with more than 780 staff and 500 residents in its 12 nursing and residential homes has gone into administration. At the time of writing, 73 care home companies have failed in 2011.

There have been many interesting legal developments in the area of property and insolvency law since our last bulletin. We hope those we have covered in this issue are of interest.

Where does a commercial landlord stand when its tenant becomes insolvent?

By Simon Painter

A common issue facing landlords of commercial premises is to decide what to do if one of its tenants has stopped paying the rent and has entered into one of the types of insolvency prescribed by statute. In the case of companies, these can include company voluntary arrangements, administration, administrative receivership, Law of Property Act receivership or liquidation. In the case of individuals, they might include individual voluntary arrangements or bankruptcy.

In theory, the landlord is in a stronger position than some other creditors because of the extra remedies available to it under the law relating to landlord and tenant. Provided the lease contains standard provisions, a landlord (absent insolvency) would normally be able to forfeit the lease, either by court action or by peaceable re-entry, to distrain for the rent against certain goods of the tenant at the premises or sue for the rent by court action.

In most types of insolvency, the landlord's ability to take the sort of action set out above is curtailed by the insolvency rules, so that any such action will be stayed or require permission of the court. However, there are some exceptions to this rule, as set out below.

Liquidation

In the case of a winding up (or liquidation), the landlord's remedies depend upon whether there is a voluntary or compulsory winding up. A voluntary winding up may be either a shareholders' voluntary winding up or a creditors' voluntary winding up. In such cases there is no moratorium on the actions of a landlord as such, however, another creditor or the liquidator may apply to the court for an order to restrain any action or proceedings by the landlord. In the case of a compulsory winding up, permission of the court will be needed if a landlord wishes to take enforcement action.

Receivership

In the case of receivership, which may refer either to an administrative receivership or a receivership under the Law of Property Act 1925, the appointment of a receiver does not affect the landlord's enforcement remedies, although the landlord may find it has to deal with the receiver rather than the tenant.

Company Voluntary Arrangements (CVAs)

In the case of CVAs, there is a difference between 'small' companies and other companies. A small company is one that satisfies two or more of the following criteria: A turnover no greater than £6.5m; balance sheet assets no greater than £3.26m; no more than 50 employees. If a tenant company comes within those criteria, it may file at court for a moratorium preventing enforcement of remedies by the landlord.

In relation to companies not deemed to be small companies, there is no moratorium on landlord action and enforcement remedies depend on the terms of the CVA, the default position being that the landlord may enforce its remedies unless the CVA specifically removes this right.

Individual Voluntary Arrangements (IVAs)

In the case of individuals who have entered into IVAs, the right of the landlord to distrain will depend upon the terms of the particular IVA. However, a landlord will need leave of the court to take court action to recover arrears of rent and/or to forfeit.

Bankruptcy

In the case of bankruptcy, the landlord may distrain for up to six months rent that has accrued prior to the bankruptcy order being made; however, leave of the court is needed to begin any court proceedings for recovery of the rent. The landlord does not need permission to forfeit the lease. In summary, if the landlord finds itself with an insolvent tenant who owes rent, there are various options available, albeit in some cases limited ones, depending on the type of insolvency involved.

Bankruptcy v Wife's right to occupy

By Katie Hamilton

In Re Ruiz (a bankrupt) [2011] EWHC 913 (Fam) the High Court ruled that a wife's right to occupy the matrimonial home did not prevent her husband's trustee in bankruptcy (TiB) gaining and enforcing a proprietary interest in the property.

The Facts

M and G married in 2001 and moved into a house purchased by M and registered in his sole name. In 2006 divorce proceedings were initiated, following which G obtained a freezing order over M's assets and an occupation order over the marital home.

During 2006/7 M ran up large debts (some in breach of the freezing order). In December 2007, unable to make his repayments, M petitioned for his own bankruptcy. M disclosed that he was in the midst of divorce proceedings but did not disclose the freezing or occupation orders. He declared assets of £300,000 and debts of £66,000. Although M was not balance...