How to help your troubled retail tenant

What should you do if your retail tenant is in trouble? Keep talking and follow our essential guide to navigating uncertain waters, writes Joanna Lampert, Mark Reading and Johnny Kelly Following a number of recent high-profile insolvencies on the high street, landlords often ask how they can best protect their interests while giving their tenants some breathing space to try to address their financial woes. Here are our suggestions for how to do so.      Avoiding nasty surprises Keeping in touch with your tenant and being aware of its current performance are paramount and will mean any problems can be managed in good time, instead of waiting until crisis hits. Options for achieving this include: 1. Arranging monthly meetings between the tenant and your asset manager at the property (if possible) so you have complete visibility on how the business operates; 2. Setting up press and/or Companies House alerts for articles relating to the tenant; and/or 3. Including an obligation in your leases for the tenant to produce monthly turnover reports, even if the rent is not linked to turnover. These provide monthly “snapshots” on the tenant’s financial health. These are more insightful than annual returns, which often paint only a historic picture. Make love, not war A landlord should try to work in partnership with its tenant in order to maximise success and benefit for both parties. If it looks as if your tenant is in difficulty then: ■ Be up front and have an open and frank discussion; ■ Try to identify the root cause of the problem; and ■ Explore possible solutions broadly acceptable to you both. These might include: ■ Agreeing for rent to be paid monthly (rather than quarterly); ■ Agreeing a repayment plan (if there are already arrears); ■ Assisting the tenant with drawing up a new business plan; or ■ Discussing whether there is another property in your portfolio (whether smaller, at a lower rent, or in an alternative location) that would be better suited to the tenant’s business. Being proactive and engaging with your tenants will put you ahead of the game, which could mean that your interests are better protected than those of other landlords, should the tenant ultimately becomes insolvent. Recovering what you are owed  If, having explored solutions with a tenant, it still falls into arrears, a landlord is left with little option but to start arrears recovery action. This can include: ■  Exercising “commercial rent arrears recovery” (CRAR) which can be used to collect rent, VAT and interest on those sums, but not other sums. ■  Bringing court proceedings for the arrears, obtaining an order requiring payment and enforcing this. ■  Attempting to forfeit (or terminate) the lease altogether. The tenant can, however, ask the court to grant it relief and cancel the forfeiture on the condition that it pays all arrears and the landlord’s costs. ■ Claiming rent directly from any sub-tenants. ■ Claiming from guarantors (if any) and certain former tenants. ■ Drawing down from a rent deposit, if there is one. If the tenant has breached other obligations in its lease, such as repairs, then the landlord can also take action, although there can be additional procedural hurdles that need to be taken in relation to these. What if tenant insolvency is inevitable? In some circumstances, despite best efforts on the part of both the landlord and the tenant, it is not possible to avoid the tenant entering into an insolvency process. The different insolvency processes each have their own quirks and it is crucial for a landlord to quickly understand which process applies, as this may affect the way in which the landlord goes about protecting its position.  The processes that might apply include: ■ Company voluntary arrangement (CVA): this increasingly controversial process is a compromise with a tenant’s creditors, typically involving cancellation of some present or future liabilities (such as rent and/or dilapidations). If 75% of creditors by value vote to support a CVA, then it will bind all creditors (even if they don’t vote). The terms of the arrangement may prevent landlords from taking action against the tenant for a certain period.  ■ Individual voluntary arrangement or IVA: similar to a CVA, but for an individual tenant rather than a company. ■ Administration: aims to rescue a company or its business as a going concern, or at least achieve a better result for all creditors than liquidation. On entering administration, a moratorium comes into force, which prevents most action against the tenant without the consent of the administrators or the permission of the court. Administrators who trade the tenant’s business from their property will be liable to pay rent for the period of their occupation as an administration expense which takes priority over other debts. ■ Liquidation: this is where there is no realistic prospect of the company continuing to trade. The business will be shut down and its constituent parts sold for whatever money can be raised. A landlord then has to submit a proof of debt claim setting out details of its claim for sums falling due under the lease (although the chances of getting more than a few pence in the pound are sadly often slim). ■ Bankruptcy: broadly similar to liquidation, but for an individual tenant. Beware the rise of the phoenix Landlords should be alert for unauthorised occupiers being allowed occupation by either: 1. Struggling tenants looking to reduce their liabilities; or 2. Insolvency practitioners trying to sell the property either at a premium or as part of a wider sale of an insolvent company’s assets.  Phoenix companies (so named as they rise out of the ashes of insolvent companies) often have a similar name and involve the same management team as the insolvent tenant so it can be hard to tell who is actually in occupation. Insolvency does not, however, override alienation covenants and consent to assignment or sub-letting is still required. Joanna Lampert is a partner; Mark Reading a managing associate; and Johnny Kelly a legal director, Mishcon de Reya