Dubbed "the year of the CVA", 2018 has so far seen a spate of high profile retail insolvencies. Landlords are seeking to protect their position in this volatile climate.
The rules governing the actions landlords can take in insolvency situations are complex. They depend on whether the tenant is a company or individual, the specific insolvency process involved and whether the Financial Collateral Arrangements (No. 2) Regulations 2003 (FCAR) apply.
Specialist legal advice tailored to the specific matter in question will always be necessary, but this legal insight gives an overview of when and how a rent deposit can be enforced in the different corporate insolvency processes. It also explains how a landlord may have more options available to it if a rent deposit, or a charge over a rent deposit, is within the scope of the FCAR. We are focused here on corporate insolvency and this insight does not consider the effects of individual tenant insolvency.
A rent deposit is a sum of money given by a tenant to a landlord to secure the payment of rent and other obligations under a lease. There is usually a deed that sets out the circumstances in which a landlord can draw down on the deposit.
A rent deposit can be held in a number of different ways including, but not limited to:
The formalities for the creation of a valid and enforceable rent deposit deed have changed over the years. This insight does not address such questions and assumes that the rent deposit was validly entered into and any registration or other formalities were complied with.
Whether or not the deposit falls within the ambit of the FCAR depends upon the drafting of the rent deposit deed in each case. Given the potential benefits on a corporate tenant's insolvency, landlords should consider drafting future rent deposit deeds so as to come within the scope of FCAR.
The FCAR apply to financial collateral arrangements entered into between two parties on or after 26 December 2003, where neither party is an individual. A financial collateral arrangement secures or otherwise covers financial obligations owed by one party to the other. It must be evidenced in writing. Financial collateral includes cash or other financial instruments.
In summary, the two types of financial collateral arrangement are:
A rent deposit will not automatically fall under the FCAR. However, there are some circumstances when a rent deposit may constitute either a title transfer or a security financial collateral arrangement. This should be assessed on a case by case basis.
The landlord's options will vary according to the insolvency process involved and whether or not the rent deposit is governed by the FCAR.
Company voluntary arrangement (CVA)
IPs may be aware that there are a number of provisions in the FCAR that relate to floating charge security. In order to be effective, any security created by a rent deposit deed is highly likely to be fixed rather than floating, and so these provisions have not been addressed in this note.
Landlords may have other options available to them where a tenant stops paying rent. Some of these may be constrained once a tenant has entered into a formal insolvency process. This insight does not intend to address all of the potential implications for a landlord where its tenant gets into financial difficulty.
TLT is experienced in advising both IPs and landlords in insolvency situations. We can guide you through the process and will ensure that all potential options are considered.
Contributors: Tessa Durham, Matt Battensby, Emily ReeveThis publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions.