A Guide to Property Insolvency
Property insolvency is both a complex and opaque process that requires specialist knowledge. An understanding of insolvency law and regulation is essential. With property insolvency, the effect of the current economic climate has had on property markets needs to take into consideration. Although there has been a hint of recovery in specific locations, most notably London. However, most regional markets are still suffering and face an uncertain future.
Many still find themselves perplexed by the precise details of property insolvency. As we have discussed the law surrounding property insolvency is a complicated issue. This guide aims to highlight some of the main problems that arise with property insolvency; the two areas are tenancy insolvency and acquiring property from an insolvent seller.
Tenancy insolvency is occurring more frequently due to the current economic climate. We are seeing cases reaching the news, and in the headlines especially in the retail sector. Household names like Woolworths have had to cease trading, due to their competitive rivals. The law which surrounds tenant insolvency is a complicated subject. There are some practical actions available for landlords to take if they are becoming concerned about their tenant defaulting. These are:
- Monitoring payments; ensuring the rent and arrears stated in the lease or tenancy agreement are paid on time and in full. If not, then if you take prompt action to recover these costs earlier rather than later, you will avoid more significant arrears from arising.
- Monitoring compliance; this is an essential aspect as it includes any obligation for repairs both for the tenant and landlord. Being compliant will allow you to take action if these are breached in respect of the lease in place. Monitoring these will ensure that any disrepair is dealt with earlier rather than later before it can turn into a significant liability.
- Communicating with your tenants; having regular conversations with your tenants can help to discuss any temporary measures that you can implement if they are having money issues for example. If this was to occur payment of the rent schedule can be changed to ensure that you will receive your payment, examples of this is changing the rent payments to monthly rather than quarterly. If you were to agree to this payment change, having it mediated or recorded in writing will provide you with legal protection if payments were to be missed or remain unpaid by your tenant.
- Guarantors; a requirement that is recommended to be included in your lease is a guarantor. This will cover any liability costs if they should arise.
Acquiring property from an insolvent seller
It is vital that you are aware of the risks involved when purchasing the property from a bankrupt seller. Discounted prices due to insolvency are not always good value for money, as the risks are not reflected in the amount of the property. In regards to this the underlying dangers that can come from an insolvent seller, an example of this could be an issue with the condition or construction of the property. Purchasing a property in this way usually means that you will have a shorter timescale to exchange contracts, which means that there is less time for you to identify any existing issues with the property.
When purchasing a property, you will typically deal with an insolvency practitioner. More often than not they can and will refuse to provide replies to inquiries. This means that you as the buyer will have limited backing or recourse if any information does turn out to be correct. Another risk is that there will be no title covenants provided by the insolvency practitioner.
With these risks, it creates an emphasis on due diligence process to gain as much information as possible, from all parties. This should be from both the insolvency practitioner and external sources, this will ensure potential issues with the property are identified, and the risks are reflected in the price. It is also important that you source all the appropriate documents that are required in connection with the change of ownership. Such as:
- Discharge of any charges
- Title Deeds
- Leasehold Documents
- Previous planning permission (if relevant)
- Evidence of the insolvency practitioner’s appointment
Doing nothing will not protect your position or potential expenses that may arise. If the situation at hand does escalate; the likely consequence could be personal liability for business debts or a possible charge of fraud.
By having an insolvency lawyer on your side can help you deal with your debts and guide you through the process. Or if you are the landlord, they can help you process your case as best as possible to guarantee the most financially beneficial outcome. There are various options that you can choose, one being negotiating a voluntary agreement with the creditors and arranging a payment plan. The other could be taking voluntary bankruptcy. If possible, you should act on the debt, or pursue the debtors dependent on your situation before court arises. Early action will increase your chances of rescuing something from the case.