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Hypothec

The right to sell a Tenant’s Property

If you are a landlord and your tenant goes into liquidation, or if you are a tenant and you find yourself in this position, what right does a landlord have to retain or sell property remaining in the leased premises?

You might assume that a liquidator or administrator would have first claim on any such property, but a right does exist in favour of a landlord which may be crucial in securing sums owned where there is no rent deposit or personal guarantee.

The Hypothec

It is often overlooked by tenants and landlords alike that in Scotland a landlord has a right know as a ‘hypothec’ which comes into force in the event of liquidation or administration and automatically attaches to certain property – in preference to a liquidator.

A limited right

The right is not as extensive as a landlord might hope however.  For a start it only secures up to twelve months of unpaid rent prior to insolvency.  It cannot therefore be used to help settle the often extensive cost of repairs or service charge or any other sums outstanding under the lease.

In addition it will only cover property actually owned by the tenant.  Such property may not of course still be in the premises when the business folds.  Any items the subject to an HP, leasing or similar agreement will revert to the owner and cannot be sold.  Indeed the landlord will have to be particularly careful in this assessment or they may find themselves liable to a third party.  The most painful limitation however for a landlord is that is does not extend to stock.  These trade items go to the liquidator.

How does it work?

Firstly it is important to note that the hypothec, in so far as the above qualifications allow it to be used, comes into force immediately on insolvency.  From a landlord’s point of view they will wish however to make sure that the insolvency practitioner is advised of their exercising the right of hypothec in relation to qualifying items in the property – assuming of course that there is unpaid rent.  It would then be for the practitioner to take account of this right and to ensure that the landlord’s position is protected when they deal with the assets.  From the landlord’s point of view therefore they do not need to do anything as such. Knowing about the right and pursuing it through the insolvency practitioner will be enough.

Doing a deal

The landlord may well of course be left out of pocket by a tenant for much more than the hypothec can ever protect.  Unpaid rent, insurance, service charge, wants of repair and many other costs may all ensure that the landlord is standing in line with a number of other creditors in pursuing a claim through the insolvency practitioner.    Exercising the hypothec however may catch enough assets, or enough value, to allow the landlord to arrange a deal with practitioner which might see him skip the queue.

For further advice on this subject please contact our Associate Director John Wellburn on 01383 745779 or jw@businesslaw.co.uk.

 

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