A word of caution for commercial landlordsTuesday, 22 September 2020
Ireland reopened for business in Summer 2020, after months of being mothballed by COVID-19 restrictions. Conditions remain challenging for many businesses, with reduced capacity arising from social distancing and hygiene requirements and the potential for further disruption due to the intermittent escalation of local or national restrictions. Tenants of commercial premises may now seek to renegotiate their leases in a bid to reduce costs and share risk with their landlords. Landlords may be reluctant to share the pain but, when considering requests to regear leases, landlords should be cognisant of the restructuring opportunities available to tenants which could result in a very unsatisfactory long term outcome for them.
Despite the unprecedented economic crisis resulting from the COVID-19 restrictions, there was an effective pause on insolvencies and restructuring of businesses during lockdown. Government supports, payment breaks from lenders, moratoriums on enforcement, commercial rates waivers, warehousing of tax liabilities and forbearance from landlords provided breathing space for businesses. This is likely to change in the coming months.
Tenants may seek to have rent reduced or restructured to a turnover model, with rent suspension to apply if they are ordered to close again due to a second wave of COVID-19. Landlords will review their leases to see what benefits they can obtain in exchange for such concessions. If agreement cannot be reached on regearing lease obligations, the alternative for some tenants may be insolvency or restructuring.
A company or its directors can apply to the court to have an examiner appointed. The examiner will examine the affairs of the company and propose a scheme of arrangement designed to ensure survival of the company and the whole or part of its business as a going concern. Once an examiner is appointed, the company has protection from its creditors, who cannot take legal action against the company or petition to have it wound up. If there are arrears of rent or service charge, the liability may be written down significantly in the scheme of arrangement.
As part of the examinership process, the company can seek to repudiate a lease of property and set it aside to effectively save profitable parts of the business and save jobs. Examinership is often used as a tool for multi-tenanted retailers to effect a restructuring of their leasehold obligations, enabling them to offload unprofitable premises.
Liquidators have a similar right to disclaim onerous contracts, which could include setting aside an “onerous lease”. A very simple example would be a lease with above market rent and upwards only rent review. Typically, if a liquidator has no use for a property, he will seek to negotiate a surrender of the lease. If the landlord will not accept a surrender, the liquidator can go to court seeking leave to disclaim the lease at any time within the first 12 months of the liquidation.
Conversely, the landlord may wish to repossess the premises due to the tenant’s liquidation. While the lease will often entitle the landlord to forfeit the lease on the appointment of a liquidator, the landlord may not act on this right of forfeiture for a period of 12 months, provided the liquidator complies with the terms of the lease, such as payment of the rent. The landlord has to wait for the expiry of the “liquidator’s year” before acting to repossess the premises on the basis that the tenant has suffered an insolvency event.
A receiver does not have the right to disclaim or repudiate a lease. The landlord, on the other hand, can generally forfeit a lease on the appointment of a receiver (subject to the usual reliefs against forfeiture). This does not affect the ability of the landlord to pursue a guarantor or have recourse to a rental deposit.
Both a receiver and a liquidator will be liable for rent and service charge due under the lease only to the extent that they use the leasehold property for the purpose of the receivership / liquidation. Any rent arrears which accrued prior to the appointment of the receiver or liquidator will be an unsecured debt and may be written down or rank behind the secured debt claim.
Proceed with caution
The economic climate remains uncertain, as all forecasts come with a "second wave" caveat. Businesses may take some time to return to profit and there is a risk of rental voids in a stagnant market. Both landlords and tenants should proceed with caution, obtaining strategic advice on lease regearing, insolvency processes and restructuring options before acting.
If you wish to discuss any of the matters raised in this article, please contact Michael Walsh or Neil Dunne of our Property/Real Estate team, John Fitzgerald of our Restructuring and Insolvency team, or your usual ByrneWallace contact.
Please note that the content of this summary does not amount to professional advice. Legal and tax advice should be sought in respect of specific queries. The COVID-19 situation is evolving rapidly and this update is provided on the basis of information available as at 22 September 2020.