Mills Selig

Mills Selig

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Landlords and Insolvent Tenants – The Impact of Highstreet Closures

Landlords and Insolvent Tenants – The Impact of Highstreet Closures

With the deadlock at Stormont reaching its 14th month, the business community in Northern Ireland is all too accustomed to uncertainty.

However, over the course of the last week a slew of famous names have announced a wave of store closures effecting premises across Northern Ireland. From pizza to flooring, the effect of the squeeze on the high street is hitting household names hard. Even retail giants such as John Lewis, House of Fraser and Debenhams have not escaped with the former announcing a 77% drop in profits.

With Toys R Us and Maplin among the latest well-known names to enter administration, and with New Look, Prezzo, Mothercare and Carpetright all negotiating with their lenders to secure rescue deals, experts are signalling a crisis on the high street with many retailers struggling to stay in business.

Consumer spending across the UK has also declined for the first time in 5 years with uncertainty around Brexit, reduced wage growth and the looming hike in interest rates causing shoppers to curtail spending. With one pound in five now spent online, are we seeing the beginning of the end of many of our “bricks and mortar” stores? As Toys R Us and Maplin potentially vacate stores in Newtownabbey, Londonderry, Boucher and Sprucefield, time will tell how many vacant units New Look, Prezzo, Mothercare and other struggling retailers may leave behind as they restructure.

The impact on commercial landlords is a legacy of rent arrears, rates liabilities, dilapidations and a struggle to re-let in an uncertain climate. As always, it pays to be proactive and heed the warning signs (persistent late rental payments, requests to vary payment schedules and requests to sub-let) which may signal a potential problem. Landlords should make use of rent deposits to offset arrears and may wish to agree monthly rental payments to assist tenants with cashflow. As rent arrears mount, the Landlord may wish to consider action against any guarantor, issuing formal proceedings for rental recovery or taking the premises back. However, if the worst happens the Landlord may be restricted as to further action.

If a Tenant enters into a Creditors Voluntary Arrangement (CVA) (as had Toys R Us prior to entering into administration) then the landlord is bound by those terms, as a creditor. Whether the landlord can pursue arrears or take other action is dependant on the terms of the CVA. Full recovery of arrears is extremely unlikely, and a creditor landlord may elect to pursue liquidation of the Tenant entity with a lease disclaimer to follow if they have a good chance of re-letting the premises quickly, or better still, have another Tenant lined up. The ability to pursue liquidation will depend on the number of other creditors and their appetite to pursue a CVA.

Once insolvency proceedings are in place the Landlords ability to take back the premises is limited. Unless the Landlord is willing to agree a surrender, it will be left reacting to the pace of the trustee, administrator or liquidator and any element of control is lost.

Until recently any arrears accrued prior to the Administrators appointment could not be recovered as an expense of the administration, however the Game Station case in 2014[1] held that rent must be paid for any period where the premises are held for the benefit of the administration.

Despite the options available to commercial landlords on Tenant insolvency, the key to longer term stability must lie in regenerating the retail sector. Increased emphasis on shopper experience has seen Waterstones flourish despite the rise of Amazon and a poor shopping experience has been attributed to Toys R Us decline. If Tenants are to invest in “retail experience” and other methods to boost footfall and sales, then they will look to our political leaders to provide stability around the future of our high streets.

With the new budget announced by Karen Bradley, there is little comfort for retailers with a 1.5% rates rise and no mention of the rates reform announced by Máirtín Ó Muilleoir in November 2016, which would have seen a £22million fund for the retail and hospitality sectors in Northern Ireland. With the collapse of the institutions in January 2017 the promised assistance for retailers has never materialised and business have been left to speculate as to whether any help is coming. One thing is clear, whether we have the restoration of a devolved government or the imposition of direct rule, the business community and retailers, in particular, will be looking to the incoming minister to take steps to stem the flow of retailers exiting our high streets and to see new enterprises taking the space left vacant by those business whose decline we have witnessed over the past week or so.

 


[1] Jervis and Others v Pillar Denton Ltd (Game Station) and others [2014] EWCA Civ 180.

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