September 27, 2019
Landlord’s Guide to Dealing with Insolvent Corporate Tenants

Introduction

In the present economic environment, many tenants are delaying or defaulting on the payment of rent leaving landlords to consider the options available to them for recovery and to avoid escalating losses.

Ordinarily, the following remedies are available to a landlord:

  1. Recourse to any deposit collected under the lease coupled with a demand to reinstate the deposit
  1. Call on any guarantee given together with the lease
  1. Distress for rent
  1. Suit or arbitration for the outstanding rent
  1. Forfeiture of the lease

However, what happens if insolvency proceedings are taken in respect of a corporate tenant before any of these steps are taken or completed.

The landlord’s position will depend upon the type of insolvency proceedings that have been commenced.

Under the Insolvency Act, 2015, a corporation can enter insolvency in three ways: Company Voluntary Arrangement (CVA), Administration or Liquidation.

We examine below the availability to the landlord of the recovery options listed above in each of these instances.

Company Voluntary Arrangement

A CVA is essentially an agreement reached between an insolvent company (in this case, the tenant) and its creditors generally for the compromise and settlement of the debts due. Once a CVA is in force, its implementation is supervised by a licensed insolvency practitioner.

When the directors of a tenant propose a CVA, they simultaneously apply for a moratorium, the effect of which is that the landlord cannot commence or continue any action in court against the tenant or for distress for rent or to forfeit the lease.

There is however nothing preventing the landlord from demanding payment of the outstanding amounts from any guarantor.

A landlord cannot ordinarily have recourse to the deposit paid by the tenant under the lease since, during a moratorium, disposal of a company’s assets or payments of debts are only permitted with the approval of the Supervisor. However, the precise position on this is unclear in cases where the landlord is not obliged under the lease to hold the deposit amount separate from its own funds.

Once a CVA is approved (by a simple majority of the members and the creditors of the tenant), the landlord will be bound by it (even if he failed to attend the approval meeting or voted against it) and cannot take any action. This however does not prevent him from taking action for any fresh breaches of the lease after the CVA has been approved.

In a CVA, the lease continues in force unless it is agreed to mutually terminate as part of the CVA. Unlike liquidation (see below), the Supervisor has no power to unilaterally terminate the lease through disclaimer.

Administration

 Administration is the process by which liquidation of an insolvent company is postponed in order to achieve a better outcome for the creditors generally. A licensed insolvency practitioner is appointed as administrator to maintain the company as a going concern for those objectives.

Once the process for appointment of an administrator is commenced, an interim moratorium comes into effect and a landlord will not be able to commence or continue any action in court against the tenant or for distress for rent or to forfeit the lease without the approval of the court.

Once administration commences, these steps cannot be taken except with the consent of the administrator or with approval of the court.

With regard to the deposit and any guarantees, the same position applies as with CVA (see above).

The Administrator does not have the power to disclaim the lease. If the tenant continues in occupation of the premises while in administration, the Administrator is liable for the rent and other obligations a part of the expenses of administration.

Liquidation

In liquidation, the company’s assets are to be sold so as to pay off its creditors as  far as possible. Broadly speaking, an insolvent company can go into liquidation in two ways: creditors voluntary liquidation or liquidation by the court. In each of these cases, the impact on the landlord’s remedies is different.

Creditors Voluntary Liquidation

The landlord will not be barred from suing or levying distress on or forfeiting a lease of a tenant undergoing creditors voluntary liquidation unless the court has, on application by another creditor, the Liquidator or a contributory, restrained those actions.

If the tenant continues in occupation, the rent continues to be payable by the Liquidator as part of the expenses of liquidation.

Liquidation by the Court

Once an application has been made to the court for liquidation of a tenant, action in court can only be commenced or continued with the leave of the court. Similarly, distress for rent cannot be levied against the tenant.

It would appear that there is no bar to forfeiture of the lease although the court may, on application by another creditor, the Liquidator or a contributory, restrain forfeiture. In fact, Section 73(1)(c) of the Land Act, 2012 expressly provides that the lease can be forfeited if the tenant “goes into liquidation”.

Where the tenant continues in occupation of the premises while in liquidation, the Liquidator remains liable to meet the obligations under the lease as part of the expenses of liquidation.

However, if the Liquidator determines that the lease is an “onerous contract” he has the right to disclaim the lease which process will unilaterally terminate the lease with effect from the date of the disclaimer.

 

Conclusion

This is general guidance for landlords to be aware of their rights and powers when a tenant goes into liquidation and is not intended to be specific legal advice.

For detailed assistance in specific scenarios, please do not hesitate to contact us.

Daly & Inamdar

Abdulhafeez Noorani

Partner

Noorani.A@dalyinamdar.co.ke

27 September 2019

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