Businesses in financial difficulties are increasingly seeking ways of ridding themselves of extra costs and, in many cases, premises let in more promising economic times are viewed as a substantial and avoidable liability, especially for businesses which have expanded too quickly.
One of the more common ways for a business to be restructured on a more profitable basis is to arrange to take the profitable parts into a new business by doing a ‘pre-pack’ administration – a procedure whereby the business, or part of it, is transferred to a new entity. Prior to this, the business will be placed into administration, which imposes a moratorium on legal processes, such as the landlord’s right to make the lease forfeit by peaceable re-entry.
The argument for pre-packs is that they maximise the chance of salvaging the business and preserving employment. On the downside, the creditors of the original business are often left nursing losses.
From the landlord’s perspective, a tenant which undertakes a pre-pack may well leave the rented unit behind if it is uneconomic to retain it, thus leaving the landlord facing the prospect of finding a new tenant and a loss of rental income.
If the new business wishes to retain the unit, there may be scope for the landlord to negotiate with the new occupier with regard to arrears of rent as well as adherence to the lease covenants.
The good news for landlords is that in most cases they should be entitled to retain a rent deposit paid by a tenant that goes into administration.
A recent case has also confirmed that it will be difficult in many circumstances for administrators to assign a tenancy 'by operaton of law' - the landlord will normally have to made it unequivocal by its conduct that the prior tenant's tenancy had ended and a new tenancy begun.