With the decreased footfall on high streets across Scotland, many retail sector landlords are faced with the prospect of insolvent tenants, leased commercial property lying empty and unpaid rent.
In light of the compulsory liquidation of Thomas Cook, what should landlords be aware of when a commercial tenant goes into liquidation?
Ending the lease
When a commercial tenant goes into liquidation, until the company itself is dissolved by the liquidators, the tenants liable for payment of rent. During this period, landlords should be aware of the following:
- If the tenant is in arrears the landlord can serve a written pre-irritancy notice on the tenant setting out how much is owed to the landlord and the date by which the arrears must be paid.
- The tenant then has 14 days, or a specified period, to pay to the landlord the sums due. If the tenant fails to do so, the lease may be irritated and in turn terminated.
In Scotland, a lease will continue to be enforceable in spite of the appointment of a liquidator. However, the process of winding up or liquidation will usually, but not always, be specified in a commercial lease as an event entitling the landlord to irritate the lease. The landlord’s tool of irritancy allows them to evict a tenant who is in breach of their contractual obligations under the lease. In such circumstances where the lease is irritated, then:
- the lease would be terminated;
- the tenant would be evicted;
- the leased premises could be remarketed by the landlord; and
- the landlord would then be able to sue the tenant or liquidator for any unpaid rent.
Another route for landlords following the liquidation of a commercial tenant is to agree with the liquidator that the liquidator will surrender the lease. This would again allow the landlord to evict the tenant, remarket the leased premises and sue for sums due by way of unpaid rent.
Once a commercial tenant enters liquidation, the liquidator is not personally responsible for the contracts entered into by the tenant and therefore not required to pay the rent due to the landlord under the lease. However, if they choose to occupy all or part of the leased premises for the purposes of liquidation or winding up the tenant’s business, then the liquidator may be liable to pay rent.
A liquidator can also repudiate the lease on behalf of the tenant which allows the landlord to rank their damages in the liquidation. However, intimating this repudiation will not bring the lease to an end. The landlord must ensure that, in such a scenario, the lease is terminated by other means.
The Landlord Hypothec
Once the liquidation of a commercial tenant is underway, any claims made by the landlord in relation to unpaid rent would conventionally be regarded as an unsecured liability.
There is, however, one possible exception for landlords to attempt to recover sums due by way of the ‘Landlord’s Hypothec’. The landlord’s right of hypothec is a common right of security over goods owed by the tenant within the leased premises up to the value of the unpaid rent.
The original practice under the right, which involved the landlord raising proceeds for sums owed to them by selling the tenant’s stock, was restricted in the 2007 Bankruptcy and Diligence etc. (Scotland) Act. The effect of the 2007 Act means that the security has been restricted to a preference on insolvency and the extent of the security applies only to the tenant’s moveable property.
Impact on Sub-Tenants
In Scotland, the termination of a head-lease will result in the termination of any subsequent sub-lease. What this means is that, if a tenant goes into liquidation, thus terminating the lease, any sub-lease will also automatically end. There is no formal procedure in place to protect a sub-tenant where the head-lease is terminated; however, where the sub-tenant has been granted an undertaking from the head-landlord, a new direct lease can be granted in favour of the sub-tenant.
The compulsory liquidation of Thomas Cook has demonstrated that insolvency is a real fear for a good number of retail based businesses. Landlords must therefore be aware of the legal mechanisms available to them to terminate leases and recover damages suffered as a result of their tenant’s insolvency.