What happens to a landlord’s property if its tenant becomes insolvent?

Insolvency of companies, even High Street giants is increasing. How does this affect commercial property owners? What can a commercial property owner do if its tenant ceases to trade and becomes insolvent?

In our article “Commercial Premises – Apparent Abandonment due to COVID” we addressed the issues faced by property owners of having commercial premises left empty by tenants whose businesses were struggling or for whom it was not economically viable to open in a limited capacity. Here we look at insolvency in more detail.

Uncertainty for landlords

The prospect of uncertainty for a landlord is not good for business. On the face of it, it would seem as though a tenant company that has become insolvent and whose lease has been disclaimed by the Crown as Bona Vacantia, would indicate that a landlord would have a freehand in granting a new lease to a tenant or selling the property. However, there was a case decided just recently which undermines this apparent certainty.

A tenant company was dissolved and stuck off the Register of Companies in January 2020. The leasehold property vested in the Crown as Bona Vacantia when the company was dissolved.

The insolvent tenant company had an outstanding loan that had been registered as a legal mortgage against the leasehold property. The mortgage company did not agree with the Notice of Disclaimer of that mortgage issued by the treasury solicitor. The mortgage company issued a claim in the Court for a declaration that it was still entitled to a legal mortgage on the leasehold property. In addition, the former director of the company restored the company to the Company Register.

Leaving to one side the issue of the mortgage, the judge in the case had to decide what happens to a leasehold property which has become disclaimed when the company who had owned the leasehold title has been restored to the Register of Companies. The judge decided that pursuant to Section 1028 and 1032 of the Companies Act 2006 that when a company was restored to the Register, it was deemed to have continued in existence as if it had never been dissolved or struck off. Consequently, transmissions of title were avoided because they were a function the company being dissolved. As a result, the disclaimer of the leasehold title was a function of the dissolution of the company and so was avoided. The effect of this was that the leasehold title was automatically revested in the company when the company was restored to the Companies Register. The function of the Crown disclaiming that lease was avoided.

How does this affect a landlord of a disclaimed lease by an insolvent tenant company struck off the Register?

This decision leaves landlords in an unenviable position. It removes the certainty that landlords previously had that if a tenant company had been struck off the Register and the lease disclaimed, the landlord could enter into any subsequent transactions regarding that property.

This decision could also affect the value of that property because of the uncertainty for a new tenant taking up occupation of it. It would be similar to the situation where a landlord has forfeited a lease and a new tenant takes up occupation of it when there is still the prospect of a relief from forfeiture application by the former tenant. It could reduce the value of the affected property for prospective purchasers of the freehold or prospective tenants because there will be a period of uncertainty and disruption.

In summary

Landlords will need to continue to take advice as soon as a tenant company is at risk of being dissolved or struck off the Register of Companies and a full review of the potential rights of third parties should be undertaken so that a landlord can decide how it wants to deal with its property going forward.

More information

Pinney Talfourd are experts in Commerial Property Litigation and can advise you on changes to the law so you are given up to date advice.

Please do not hesitate to contact either Stephen Eccles by email or on 01708 463202 or Oliver-James Topping by email or on 01708 463227 should you wish to discuss anything further.

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of December 2020.