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Wake-up call: Are you liable for another business's mistakes?

05 August 2016
Wake-up call: Are you liable for another business's mistakes?

When purchasing a property that is on the market because the former tenant went into administration, there are a number of risk-minimising measures that you can take, says Claire Timmings

The problem

You are looking at expanding your business and a portfolio of restaurants has recently come on the market as one of your former competitors has gone into administration.

You have been locked in a bidding war to purchase the properties, but you are concerned because at least two of the properties are in a fairly poor state of repair and the landlords are insisting that all previous rent arrears are paid to allow the leases to be transferred to you. Could you be required to take on these liabilities if you proceed?

The law

When a company goes into administration, a moratorium is imposed over all of its assets and liabilities, which means that any party which is trying to enforce its obligations against it (including a landlord of a lease) cannot do so unless they get the consent of the administrators or the court authorises this.

In practice, this means that most landlords have their hands tied while a tenant company is in administration, and have a stalemate situation where the administrators are looking to dispose of the property but still need the landlord's consent to allow it to transfer the lease to a third party.

Under most leases a landlord can usually insist on certain conditions being satisfied before consent is given to allow the sale. This can include payment of any outstanding rent and sufficient security being given to guarantee the liabilities of any proposed tenant on the lease.

Expert advice

Ideally you should, when you are looking to put in a bid for properties, try and get as much information in advance about them and obtain a survey of the property to check if there are any repair issues or problems and ask for details of any outstanding arrears and other payments.

Administrators will normally have limited information on the property, but will have obtained some financial background to assess the position of the company in the administration.

There are likely to be missing lease documents and other materials, so the scope of your due diligence may have to be limited, but you need to factor that into the price that you are prepared to pay for buying the properties.

To-do checklist

Always carry out a detailed survey of the property before agreeing to take on the lease.

Get your solicitors to undertake searches and enquiries, and obtain copies of documents from the Land Registry and the landlord's solicitors where possible so you have full information.

If it could be difficult for the landlord to re-let the property, you may be able to negotiate terms to mitigate some of the liabilities under the lease; for example, limiting the repair obligation by reference to an agreed schedule of condition showing those items you are not required to remedy and an agreement on any past arrears.

Avoid giving any personal guarantees on any lease assignment and seek where possible (depending on your cashflow) to only provide a rent deposit which should be limited to a given amount of rent for a fixed period. Try and negotiate early release mechanisms with the landlord so that if net profits exceed three times the annual rent for three years the rent deposit will be released (or if earlier on assignment or at the end of the lease).

Beware

If you buy a property from an administrator, they will not accept any responsibility or liability on it as they will not be in a position to do so.

The landlords will try and pass on the liability to you as the new tenant, so you need to make sure you mitigate the extent of your liability where possible and negotiate with the landlord if market conditions allow. Any landlord is likely to prefer keeping a tenant in situ rather than having an empty property and be liable for business rates.

Contact

Claire Timmings is a retail and leisure property lawyer at Charles Russell Speechlys

claire.timmings@crsblaw.com

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