Are you ready for tenant insolvency risks in light of a Brexit scenario?

United Kingdom

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

It is clear that the uncertainty surrounding Brexit is sending jitters across the British economy. Last month, the IMF cut its growth forecast for Britain for this year to 1.9 per cent. Recent research by data compiler Real Capital Analytics shows that worries over a possible Brexit contributed to an £8 billion slump in spending on UK commercial property in the first three months of 2016.


If they have not already started contingency planning concerning the Brexit vote, companies and their directors ought to be. In this article, we consider some of the proactive measures which landlords can take to avoid being caught on the back foot in the event that economic uncertainty translates into financial difficulty for their tenants. If a tenant does enter into a formal insolvency process, there are steps which the landlords can take to minimise their losses.

What can landlords do to mitigate the risk of tenant insolvency?

  • "Spring clean" your standard form leases – as a matter of good house-keeping, it is worth landlords reviewing their existing standard form leases every so often, to check whether they contain adequate insolvency related protections. For example, we sometimes see leases which contain out dated definitions of "insolvency" or "insolvency event". There is no statutory definition of "insolvency" or "insolvent", so any reference to the same should be by reference to the statutory insolvency tests in the Insolvency Act 1986. A common omission is for the definition of insolvency event to include the making of an administration order against the tenant, but not take into consideration that a tenant can also enter into administration via the out of court administration route introduced by the Enterprise Act 2002. Of course, by the time the tenant has entered into a formal insolvency process, it might be too late for the landlord to take measures to minimise his losses. It is important therefore that the definition of insolvency event in your standard form leases also includes steps taken by the tenant or one of its creditors ahead of the actual commencement of the formal insolvency process (e.g. the presentation of a winding up petition or the passing of a resolution by the directors of the tenant to enter into a voluntary winding up). Similarly, your leases should contain appropriate tenant-side information undertakings, so that any early warning signs of tenant difficulty are not missed. The CVA should clearly state what happens if a tenant does not comply with its terms. Although you sometimes see CVAs which terminate automatically upon the tenant's failure to comply with its terms, a CVA usually defines events of default and requires or gives the supervisor the discretion to take further action if those events of default occur. It is important to check whether the termination provisions work for you.
  • Company voluntary arrangements (CVAs) – a CVA is an arrangement between a company in financial difficulties and its creditors for the discharge of its liabilities which provides the company with an alternative to liquidation or administration. The approval of a CVA (or any modification to the CVA proposal) by a creditors' meeting requires a majority of 75% (by value) of the creditors attending the meeting (in person or by proxy) to vote in favour of it. If approved by the requisite majority of the company's creditors and members, the CVA is binding on all creditors; regardless of whether they have agreed to it (although a creditor can in some circumstances challenge the CVA if its interests have been unfairly prejudiced). CVAs are often used by corporate tenants to compromise landlord claims in the short to medium term, which may be commercially attractive to landlords where, for example, the alternative is an empty property. The party proposing the CVA must give at least 14 days' notice of the meeting of creditors at which the creditors will consider and vote on the CVA proposal, but it is important that landlords request a copy of any draft CVA proposal at an early stage and engage quickly with the nominee and their professional advisers as it may be possible to negotiate improved terms ahead of the meeting. As a CVA is essentially a statutory contract between a company and its creditors, each is fairly unique, so careful scrutiny of its terms is key.
  • Know your rights – CVAs are not always successful, as recent high profile examples have shown. In those cases where a corporate tenant cannot avoid administration or liquidation, it is important that landlords know their rights. These rights include, for example, the right to the payment of rent as an expense of the administration or liquidation for the period that the office holder retains possession of the property for the benefit of the administration or liquidation.

Please click here or for more information or to discuss further please contact:

Simone Ketchell
Partner
London

Antoni Hajdon
Legal Director
London

Alicia Videon
Partner
London

Julian Turner
Partner
London

Emma Bardetti
Senior Associate
London

Caroline Dodman
Associate
London