Managing your property in challenging times


We understand that these are worrying times for everyone. Owning and maintaining a property can put additional strain on financial resources. Whether you are a landlord and your tenant is unable to pay the rent, a tenant and you need to get out of your lease, fear that you may be insolvent, or indeed a guarantor or surety to a lease or mortgage, this is a short guide to highlight the options that are available to you.

TENANT

If you are a tenant and you need to get out of your lease obligations, what are the options?

On the basis that you are a solvent company or individual, the following may be considered.

  1. 1. Assign the Lease
    If you assign the lease to a third party (the assignee), you can transfer all of your obligations under the lease to them. It is important to get the consent of the landlord to any such assignment. If you do not get the consent of the landlord, then in strict legal terms, you will continue to be responsible for any breach of covenant of the assignee.

  2. 2. Surrender the Lease
    Depending on the circumstances of the landlord, the landlord may allow you to surrender the lease.

  3. 3. Sub-Let
    If you can find another tenant who would like to take up occupation of the property, the terms of the lease may allow you to sub-let all or part of the property. The consent of the landlord is required before one can sub-let and you should be sure that the terms and the conditions in the sub-lease are the same as those in the lease from the landlord to you.

  4. 4. Rent reduction
    Some tenants have managed to negotiate a rent reduction with their landlord. This is an option, which is really at the discretion of the landlord. Most existing rent review clauses are upwards only however the landlord may decide to waive this and reduce the rent.

    5. If the company is insolvent, or an individual tenant is bankrupt, the liquidator, (if a company) or Official Assignee, (if a bankrupt), may utilise the following option:

  5. 5. Disclaimer
    Company and bankruptcy legislation provides that if the liquidator or official assignee decides that a lease is too onerous, it may disclaim the lease. Both liquidator and official assignee must seek the leave of the court in order to disclaim and the court will decide whether it is in order to do so. Any disclaimer affects only the interest of the tenant, and the rights of third parties are protected. The company or individual may still be sued by the landlord if there are arrears of rent. Recent High Court and Supreme Court judgments have established that a lease can also be disclaimed / repudiated by a company or the Examiner during a period of examinership.

LANDLORD

If your tenant is not in a position to pay the rent, the tenant may come to you with a proposal for getting out of the lease or bringing the lease to an end. These are the options for you:

  1. 1. Forfeiture
    Depending on the terms of the lease you may be able to forfeit or bring the Lease to an end for non payment of rent. Unless the tenant cooperates in giving you possession, this may involve you in having to sue the tenant for possession and arrears of rent.

  2. 2. Assignment
    Your tenant may ask you to consent to an assignment of the lease. You should ensure that you are happy with the new tenant and seek financial information from them to satisfy yourself that they will be in a position to pay the rent for the rest of the term. It may be reasonable for you to seek a guarantee from a third party on behalf of the assignee.

  3. 3. Surrender
    Your tenant may ask if you will accept a surrender of the lease. Depending on the length of the lease, this may have financial and tax implications for you. It means however that you will get the property back immediately and that you should have the rent paid up to date. You should ensure that the rent and all outgoings, such as rates, are paid up to the date of the surrender.

  4. 4. Sub-Let
    If your tenant would like to sub-let the property to another party, your consent will be required. You will still need to be satisfied that the proposed sub-tenant is of good financial standing as your tenant will be relying on the sub tenant to pay the rent.

  5. 5. Rent reduction
    As a landlord, you may consider a rent reduction in order to keep a tenant. Better for the rent to be reduced and actually paid, than for it to remain at a higher level and have to institute legal proceedings for its recovery, or indeed seek a new tenant when the market is flooded with properties.

  6. 6. Insolvency
    If your tenant is insolvent and a liquidator is appointed, an individual is adjudged bankrupt, or a company goes into examinership, what happens to the property?

In a liquidation situation, the company will still have to pay the arrears of rent and outgoings up to the date of the appointment of the liquidator. If these are not paid, they are dealt with by the liquidator as an unsecured claim. Depending on the circumstances of the company, this may never be paid. If the liquidator must remain in the property, then it will be responsible for paying the rent alongside the other liquidation costs during this period and these will rank in priority to other creditors. The liquidator may also apply to court to disclaim the lease. The court will decide whether or not the lease can be disclaimed. The liquidator or official assignee will be liable to pay the rent up to the date of application for disclaimer. Thereafter, if there are arrears, unfortunately the debt must be proved on bankruptcy or liquidation and you must join the queue to be paid along with other unsecured creditors.

The situation where a company is in examinership has, until recently, been unclear. However recent Supreme Court judgments have held that a tenant in examinership can disclaim a lease that contains onerous terms. This is not a welcome development for Landlords.

6. Guarantor

If there is a guarantor to the lease, the disclaimer by the liquidator / examiner will not affect the guarantor’s liability to you under the lease.

This is an extremely complicated area. Before deciding on a course of action, it is very important that you consider the consequences of what you propose doing from a tax and legal perspective. For more detailed advice, please contact a member of our Property and Private Client Department.