COMMERCIAL
anything like similar terms. On the plus number of days after which interest PROPERTY DEVELOPERS
side, you could conceivably agree to accept (generally at four per cent over base rate) Make sure that, on your contractor’s
payment monthly rather than quarterly in is payable on any arrears. Any lease should insolvency, the contract is determinable at
exchange for a modest increase in rent or also provide for interest on arrears. Ensure your option rather than terminated
agreement of an outstanding rent review. the rate is at least four per cent over base automatically to afford you the opportunity
As for any new guarantees or rent deposits, though and make sure the number of days to negotiate with the contractor or its
although always being in definitive terms, after which it becomes payable is seven or insolvency practitioner with a view to
guarantees are not usually affected by a less if the forfeiture clause states say 14 and completion of the works.
tenant’s insolvency, bear in mind the zero if it states seven. However, before Before entering into the contract, check
possibility that a corporate guarantor will exercising a forfeiture clause, consider the the contractor’s financial position
often be in the same group as the tenant marketability or otherwise of the empty thoroughly. If the contractor is a subsidiary,
and also become insolvent. However, any premises, the need to repair or redecorate seek a parent company guarantee.
guarantor, corporate or personal, will in readiness, any business rate or insurance Consider also a performance bond,
remain liable for the remainder of the term, obligations reverting to you and the cost of particularly if there are no other credible
even after the lease is disclaimed by a recovering and securing the premises. group guarantors. For future defects, if
liquidator or trustee-in-bankruptcy of the Also consider whether the lease includes a possible, obtain collateral warranties from
tenant. Make sure any new rent deposit reasonably imminent, mutual break option, sub-contractors and ensure that these
deed provides for your drawdown of the which you could take advantage of in order include step-in rights to prevent a
rent deposit even if the tenant goes into to negate the cost of any forfeiture sub-contractor terminating for the
receivership or liquidation. Also make sure proceedings. contractor’s insolvency. However, also
it includes either an obligation on your part If a tenant does become insolvent, you consider a latent defects insurance policy.
to repay the deposit at the end of the term can also commence proceedings for any Also ensure that the contract provides
or a provision that the deposit remains the arrears, issue a statutory demand and relief from further payment to the
tenant’s but is subject to a charge in your petition for winding up or bankruptcy, contractor with effect from the date of its
favour. That way, the deposit is likely to be exercise distraint on any goods on the insolvency without the need for service of
a financial collateral arrangement and, as premises, issue a warrant of execution/ a withholding notice. You will be able to
such, exempt from the use such payment to complete the works.
statutory moratorium if In the event of your contractor’s
the tenant goes into
Many banks are looking
insolvency, consider retaining the
administration. sub-contractors and contracting with them
Under any leases
to reduce their levels
direct with a view to minimising delay and
granted by you before maintaining continuity. It is quite
1 January 1996, the
of debt and the likelihood
conceivable that the sub-contractors are
original tenant will prepared to do a commercial deal. But
remain liable
is that re-financing with
ensure that there is an express right of
throughout the term, subrogation in the contract or sub-contract
as will any assignees,
another bank will be
enabling you to claim for a sub-contractor’s
provided they have right to payment from the contractor and,
covenanted with you to
difficult.’
if practicable, that the contractor’s liability
that effect in your to the sub-contractor is assigned to you.
licence to assign, so Secure the development against removal
ensure that they do so. Under any leases instruct bailiffs or apply for an attachment of on-site materials by unpaid
granted by you on or after 1 January 1996, of earnings order on any employer. sub-contractors or other creditors of the
ensure that any assignor enters into an Consider the merits or otherwise of these contractor. Materials already affixed to the
authorised guarantee agreement whereby options on a case-by-case basis. You can land are your property.
it guarantees the assignee’s performance of also serve rent diversion notices on any As for off-site materials, provision for
the tenant covenants and agrees both that sub-tenants. There is some debate as to title to pass to you on payment being of
it is liable to you as primary obligor and to whether doing so when the tenant is in little practical benefit, make sure the
accept a new lease if the lease is disclaimed. administration is in breach of the statutory contract provides both that the contractor
moratorium but it is probably not. must supply you with reasonable proof of
FORFEITURE There is also the possibility, where ownership and for their identification as to
Any lease should provide for your re-entry premises continue to be traded from or where they are stored, that they are held to
of the premises and forfeiture of the lease otherwise used, of persuading the your order and that they are destined for
in the event of the rent being in arrears for liquidator or administrator to pay ongoing the development. And, ideally, get an
a certain number of days (whether or not it rent as an expense of the liquidation or off-site materials bond at the outset.
is formally demanded), the tenant’s breach administration in priority to all other debts.
of covenant or the tenant’s insolvency. Do bear in mind that your remedies as Andrew Hardcastle, Partner, Moorcrofts LLP
Historically, that number of days is often landlord against an insolvent tenant may www.moorcrofts.com
21. Nowadays, 14 is more common and vary according to the insolvency procedure
seven, increasingly so. Ensure it is as low as in question and so you should seek legal
Do you have any comments to share?
possible but make sure it is more than the advice, as appropriate.
www.propertydrum.com/articles/debtissue
PROPERTYdrum JULY-AUGUST 2009 71
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