Biggart Baillie Solicitors

Landlords’ Rights on Tenant Insolvency – What every landlord should know

Thursday, March 25, 2010

by Alistair Drummond

It may not always come as a surprise, but it is always a time of uncertainty for landlords when a tenant enters a process of formal insolvency. This brief note highlights two legal options available to landlords, one a right under Scots Common Law known as Landlord’s Hypothec, and the other arising in the last few months from the Court of Appeal in London in the case of Goldacre (Offices) Ltd v Nortel Networks UK Ltd (In Administration). These rights may redress the balance in favour of landlords, having the potential to allow for recovery of rent arrears and future rent.

Landlord’s Hypothec

A Landlord’s hypothec is a form of real security over the moveable property (including stock etc.) which (a) belongs to the tenant and (b) is situated within the let premises at the point of insolvency.

The effect of the hypothec is that those moveable items (or their net realisable value) are to be applied to the satisfaction of the landlord’s claim for all unpaid rent equally with those claims of other secured creditors and in preference to the claims of ordinary creditors.

The hypothec may have a significant effect on the level of recovery by the landlord for his outstanding arrears of rent. The hypothec arises automatically by operation of law and the landlord need not commence Court proceedings to enforce his available rights.

It is advisable however for a landlord to intimate to the Insolvency Practitioner (IP), as soon as reasonably practicable, that he intends to claim or enforce his rights arising by virtue of the hypothec.

For example, upon being made aware of a tenants’ insolvency and where there are arrears of rent (which is invariably the case), a landlord ought to contact the IP in writing asserting his rights under the hypothec.  At the very least, we would suggest that reference to the hypothec should be included in any response to any claim form issued by the IP which will typically request details of any “security” held by the landlord.

When intimating the hypothec to the IP it is advisable also to request that the IP produce details of the inventory of stock taken upon his appointment together with any valuation of the goods owned by the tenant within the premises.

Payment of Rent as an Expense of an Administration

The recent case of Goldacre (Offices) Ltd v Nortel Networks UK Ltd (In Administration) which was decided by the Court of Appeal in London on 7th December 2009 has given rise to a significant opportunity for landlords to have their rent paid as an expense of an administration. This opportunity arises where the administrator continues to occupy or retains all, or a significant part, of the premises for the benefit of the administration.

The important change made by this case is that it is now clear that payment of rent as an expense in these circumstances is not a matter for the discretion of the administrator but is mandatory. In view of the similarity of the relevant insolvency rules both north and south of the border, there is no reason why a similar approach ought not be adopted in Scotland.

Therefore, it is prudent for any landlord in Scotland, upon his tenant being placed into administration, to write immediately to the administrator to ascertain whether he intends to continue to occupy, use or retain possession of the premises and, if so, that the rent will require to be paid by the administrator in accordance with the terms of the lease as an expense of the administration.

At Biggart Baillie we have bespoke correspondence for use on behalf of landlords upon a tenant’s insolvency to deal with both asserting the landlord’s hypothec and claiming rent as an expense of an administration. To find out more or to seek advice please speak with your usual Biggart Baillie contact or contact Alistair Drummond, Partner, in our Property Dispute Management Team (adrummond@biggartbaillie.co.uk or 0131 474 5541).