Buyers of insolvent businesses: Unwelcome guests or a pleasant surprise?

Danny Revitt looks at a landlord’s options when a tenant’s liquidators or administrators allow a purchaser of the business into immediate occupation of premises without the landlord’s consent The recent news that Hays Travel had acquired the entirety of Thomas Cook’s UK retail estate following its liquidation was welcomed by more than 2,000 former Thomas Cook employees, who Hays Travel recruited to continue to provide travel agency services from many of those 555 branches. However, the unwritten story behind the headlines is that the purchaser of an insolvent business can’t simply present itself to landlords as a new tenant. Most business leases require a tenant wishing to assign its interest to obtain the consent of the landlord acting reasonably. Many former Thomas Cook landlords will have been pleasantly surprised to learn about the Hays Travel acquisition and may readily consent to an assignment to an apparently profitable and debt-free business, especially when they expected to be saddled with empty premises that could have been difficult to relet in the current market. However, landlords of insolvent tenants should not automatically agree to take on the business purchasers as tenants, particularly where there are doubts about the future financial viability of the purchasers or the landlord has a better option from another interested tenant. We consider below the steps that a landlord can take in those circumstances. Who invited you? A sale of the assets of an insolvent business by administrators or liquidators will often include its business premises. However, while title in the assets can be immediately transferred to the purchaser, the need for landlord’s consent to a lease assignment usually leads to the administrators or liquidators granting a licence to the purchaser to occupy any business premises. This action is usually in breach of the lease, and it is in any event arguable that a licence hasn’t been created, as in practice the purchaser is usually given exclusive possession of the premises. Even if a landlord ultimately consents to an assignment to the purchaser having carried out the appropriate investigations, landlords are advised to make it clear to the tenant’s representatives that they have not consented to the occupation by the purchaser and that they reserve the right to take action to remove the purchaser from the premises. The statutory restrictions on the action that can be taken against a company in administration or liquidation do not necessarily prevent direct action being taken against the purchaser. On the basis that the landlord has reserved its position and received rent from the commencement of the administration or liquidation, it will usually then be willing to allow the unauthorised occupier a short period of time in the premises while it carries out investigations and considers whether to consent to an assignment. Recovery of rent The landlord will usually rank as an unsecured creditor in relation to any unpaid rent that fell due before the commencement of the formal insolvency and often makes no recovery or a limited recovery. However, if the premises are being used for the purposes of the administration or liquidation, a landlord is entitled to recover rent calculated from the date of commencement of the formal insolvency as an expense of the administration or liquidation, with the result that the landlord usually recovers rent for that period in full. The licence will normally require the purchaser to pay a licence fee equivalent to the rent to the administrator or liquidator for onward transmission to the landlord. Landlords are advised to make it clear when accepting such payments, especially if the purchaser proposes to pay directly, that the insolvent company will remain as the tenant until any assignment and that any payment is accepted as having been made as agent on behalf of the tenant. Stick or twist? Ultimately, following investigations into the purchaser’s financial viability, the landlord must decide whether to consent to any assignment proposed. In the current economic climate, even if they have continued doubts about the purchaser’s ability to pay the rent for the remainder of the lease term, retail landlords in particular may still be better off consenting to the assignment to maintain a short-term income stream rather than risking an extended period with a vacant unit, during which the responsibility for business rates could revert to the landlord. However, the landlord has an added decision to make in those circumstances if the purchaser declares that, rather than seeking an assignment, they will only remain in the premises in the medium term if a new lease can be negotiated on more favourable terms to the tenant than the current lease. As a recent example, the administrators of Bonmarché contacted all landlords immediately following their appointment to request that, while they looked to find a purchaser for the business, all landlords agreed not to charge rent during November 2019. They warned that in the absence of a favourable response they may review store closures more swiftly. Refusing consent and obtaining possession If consent is not given, the administrators or liquidators have the option of applying to court for a declaration that consent has been unreasonably withheld or simply proceeding with the assignment on the basis that consent has been unreasonably withheld. They rarely pursue those options in practice and are more likely to terminate the licence. If the purchaser failed to vacate, a landlord would have good grounds to both obtain any court permission necessary under insolvency legislation and succeed in any action to remove them from the premises. On realising that an assignment will not proceed, a liquidator will usually disclaim the relevant lease, ending the insolvent tenant’s interest in the lease. An administrator has no power to disclaim a lease, so will usually either try to agree a surrender of the lease or encourage the landlord to forfeit the lease. In order to avoid any potential liability for business rates, it is advisable for a landlord to refuse to forfeit or agree a surrender until a new tenant has been lined up. Danny Revitt is a partner in the real estate disputes team at Irwin Mitchell LLP Photo: Amer Ghazzal/SOPA Images/Shutterstock