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Hypothetical protection for struggling landlords

Hypothetical protection for struggling landlords

It’s been a tough time for landlords in the retail sector, with so many retailers of all sizes going bust.  Landlords often find that, absent a rent deposit, there is little they can do to protect themselves when a tenant goes into administration or liquidation.  However, there is one little discussed protection for landlords in Scotland – in the form of a security known as “Hypothec”. 

Hypothec has undergone changes over the years but it essentially operates as this – if a tenant goes into liquidation or administration, the “hypothec” kicks-in, and provides a security for the landlord over the tenant’s goods in the leased premises.  That means that the administrator or liquidator cannot simply dispose of, repurpose, or sell any of the tenant’s property in the leased premises. 

However, a hypothec’s scope is limited.  It applies only to property owned by the tenant and secures only unpaid rent due in the 12 months prior to the insolvency event. 

Items leased, on hire purchase, or subject to a retention of title by another party (e.g. where the property has been delivered but ownership does not transfer until, for example, payment) are excluded, and recovery would not extend to sums owed for dilapidations, insurance or service charge.

There is an additional rub for retail landlords – the security most likely does not apply to retail stock, as the landlord is deemed to have let the premises on the basis that stock can be sold.  But it does mean that items such as laptops, tablets, till registers and equipment, would fall under the security – if these belong to the tenant).   For those in the leisure and hospitality side of retail, it could also include tables, crockery, and kitchen equipment. 

So how does it work in practice?  Theoretically, insolvency practitioners (IPs) (i.e. liquidators and administrators) should be live to the security already.  Surprisingly, it does not require the landlord to take any step for it to become active.  However, it is safe to say that it can often be forgotten and it would be wise for a landlord to ensure that they (or their advisors) let the IP know that they are aware of this, and that they expect the IP to account for it.  In practice, for the security to have any positive effect, it requires the IP to engage with the landlord and either account to them for the money owed (to release the security) or to “do a deal” to allow them to take and sell the tenant’s items. 

There are lots of nuances and technical legal arguments about this security, but the key point is this – if your tenant goes bust and they have items of value there might just be something you can do to get a better deal.

By Stephen Farrell
Senior Associate, Dispute Resolution

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