How are Landlords Affected by a Voluntary Liquidation?

When a tenant company enters liquidation, a landlord will ordinarily become an unsecured creditor.

Learn more about this process in our practical guide for landlords.

What Happens to Landlords When a Tenant Goes into Liquidation?

When a tenant company enters liquidation, landlords face immediate concerns regarding lease continuation, rent arrears, and property repossession.

Firstly, the liquidation process typically terminates the lease agreement, although specifics can vary based on the lease terms and the liquidator’s decisions. Landlords may find themselves in the queue of unsecured creditors when it comes to outstanding rent, which means recovery of the full amount owed is uncertain.

During liquidation, the appointed liquidator will assess the company’s contracts, including leases, to decide whether to disclaim the property, effectively ending the lease, or retain it for the benefit of the liquidation process. If the property is disclaimed, landlords can repossess it, but they must navigate the loss of rental income and the task of finding a new tenant.

Landlords should also be aware of their rights to claim rent arrears and damages through the liquidation process. However, such claims will be considered alongside other unsecured debts, potentially reducing the chances of full recovery. It’s crucial for landlords to act swiftly by engaging with the liquidator to understand their position, assert their rights, and mitigate financial losses as much as possible.

How are Unsecured Creditors (such as Landlords) paid in a CVL?

It is the insolvency practitioner’s role to pay creditors based on what funds can be raised from the liquidation of company assets. He will pay secured and preferential creditors before unsecured creditors, which means landlords should be aware that they may only receive a proportion of their unsecured debts.

What are Landlords Entitled to in a CVL?

Landlords are entitled to:

(a)  deduct funds from any rental deposit

(b)  to seek a court order for termination of the lease.

(c)  In some situations, ‘peaceable re-entry’ may be appropriate

(d) Consent to the assignment of the lease to a new party

What Is Peaceable Re-entry?

‘Peaceable re-entry’ means that, if a landlord has been informed of a company’s insolvency, there may be recourse to take back possession of the property, without first getting a court order (assuming that the right to forfeit is expressly granted by the lease).

This is a high-risk strategy, in that, if anyone present opposes the landlord’s right to change the locks, it may constitute a criminal offence to proceed. Further legal issues may also arise if there are goods at the property, which would then make the landlord an involuntary bailee. A landlord’s behaviour, in this scenario, is governed by the Torts Act, which outlines a statutory method by which bailees should handle goods found on the property.

Given the legal complications surrounding peaceable re-entry, landlords would be advised to have a solicitor present if they choose to enact this option. A notice of forfeiture must also be fixed to the exterior of the premises and sent to the tenant’s registered address.

The Liquidator’s Right to Disclaim the Leasehold during Liquidation

When a company goes into liquidation, a liquidator can disclaim the lease. This is a unilateral decision by the liquidator to simply hand back the property to the landlord. The liquidator will do this by sending a form under section 178 of the Insolvency Act 1986 to the landlord and all other interested parties to disclaim the onerous lease. In addition, the liquidator will send a copy of this notice to the Registrar of Companies and to the Land Registry.

This means that from that moment on, any ongoing running costs of the property, such as utility bills and rates, will become the responsibility of the landlord once again. This is another reason that landlords need to be cautious against using ‘peaceable re-entry’, since it may preclude them from deferring potential running cost claims to the insolvent company should a dividend become available.