What Happens to a Lease When a Company Goes Into Liquidation?
When a company enters liquidation, the lease agreement does not automatically terminate. The lease is considered an asset of the company, and the liquidator has the power to decide whether to continue or disclaim it
If the liquidator believes the lease has value, they may choose to continue the lease and attempt to assign it to a new tenant or sell it as part of the company’s assets. If the lease is disclaimed, the landlord can claim damages from the company as an unsecured creditor.
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.
During liquidation, the designated liquidator will assess the company’s contracts, including leases. If the property is disclaimed, landlords can repossess it, but they must face the loss of rental income and the task of finding a new tenant.
As unsecured creditors, landlords will join the queue alongside other unsecured creditors when seeking payment for outstanding rent. Given their position in the hierarchy of debt repayment during liquidation, landlords face uncertainty in recovering the full amount owed.
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 important 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?
The IP 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 landlords must 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.
