What Happens To Your Business Lease When A Company Goes Into Liquidation?

When a company enters liquidation, control of its assets (including leased premises) passes to the Liquidator. The directors no longer have authority over company operations or property.

Why are leases a key consideration in a Liquidation?

If the lease is valuable (e.g. under market rent, or includes goodwill in the location) it’s considered an asset, and the liquidator may try to assign or sell the lease to make a realisation for the benefit of the company’s creditors
If the lease is onerous (e.g. above-market rent, in an unwanted location, large liabilities are due as a result of it), the liquidator has the power to disclaim the lease.

Disclaimer of Lease

Under Section 178 of the Insolvency Act 1986 a liquidator can disclaim a lease if it’s considered onerous. A disclaimer ends the company’s rights, interest, and liabilities under the lease.

The landlord becomes an unsecured creditor for any loss caused by the disclaimer (e.g. rent arrears or future rent). The landlord can then repossess the property and rent it out to a new tenant if they so wish.

If the liquidator does not disclaim the lease, rent may continue to accrue as a liability of the liquidation.

Effect of a Personal Guarantee

If directors or others have personally guaranteed the lease, the landlord can pursue them personally for outstanding obligations, regardless of liquidation.

Commercial Rent Arrears Recovery

CRAR is a legal process in England and Wales that allows landlords of commercial properties to recover unpaid rent by taking control of a tenant’s goods without going to court.

Under CRAR, assuming specific strict circumstances are met, landlords may be able to appoint a certified enforcement agent, serve notice, and on the expiry, seize and sell a company’s assets to recover outstanding rent arrears (not services charges, insurance etc.), often by auction.

For this reason, it is important for directors of companies that cannot pay outstanding rent arrears to seek the advice of an independent insolvency practitioner early on.

What happens to Rent Deposits on Liquidation?

When a tenant company goes into liquidation, the treatment of rent deposits depends on how the deposit was held and what the lease says.

A rent deposit is a sum of money paid by the tenant to the landlord at the start of the lease, usually held as security for things like unpaid rent, dilapidations or a breach of the lease terms.

Upon liquidation, if the lease requires the landlord to hold the deposit in a separate account as a form of trust, the landlord may retain the deposit to cover arrears or damages. This is not part of the liquidation estate, so creditors can’t claim it.

If the rent deposit was paid into the landlord’s general account and not held on trust, it may be considered part of the company’s estate and a liquidator will likely request that it is paid into the estate.

Next Steps if your Company is facing Liquidation with an active lease in place

As a specialist insolvency firm with 30 years of experience, we understand the stress caused by experiencing financial difficulties. Offering the full suite of professional insolvency services, we can guide you through the complex liquidation process and provide expert advice tailored to your unique situation. We can help you navigate the many options and choose the best route.

At Moore Stoke, we focus on creating positive outcomes from difficult situations and will always try to save your business as a priority. The sooner you talk to us, the greater your range of options, so get in touch today.