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The pre-pack recession - are landlords adequately protected?
29/10/2009

Phil Parker, associate at leading North West corporate law firm Brabners Chaffe Street.


The use of pre-pack administrations is becoming increasingly prolific in the current economic downturn, but is this much-criticised practice short changing retail landlords?

Put simply, pre-packs allow collapsed businesses and their assets to be sold on seamlessly to a pre-arranged buyer, shorn of many of their liabilities. This enables customer-facing businesses, where traditional administration procedures could damage a brand, to continue to trade without disruption as a new corporate vehicle. Crucially, only those assets, including staff, required by the business going forward are transferred to the new corporate vehicle, meaning that to the outside world, it can appear as if nothing has changed.

However in many cases, the `new` businesses are simply owned and run by the same management who presided over the previous company`s demise. This can lead to anger from landlords, who often feel that a better deal could have been secured by selling the business in the open market, particularly if their properties are not transferred within the pre-pack, and a feeling of a lack of transparency from directors.

To address some of the concerns about pre-packs, the Institute of Chartered Accountants introduced a Statement of Insolvency Practice 16 (SIP 16), which has been effective since the beginning of this year. This does appear to be offering some protection for landlords - the Insolvency Service believes that a third of all pre-packs over the first six months of 2009 did not comply with SIP 16, owing primarily to a lack of sufficient information, the links of the pre-pack to existing directors and in particular, whether best value was obtained.

Landlords wanting to protect themselves in the event of a future pre-pack administration need to keep an eye on defaulting tenants, and actively manage them, so that prompt action can be taken, such as levying distress before administration. Maintaining dialogue, both with these tenants and other landlords is critical, as the courts have so far been reluctant to interfere with pre-pack arrangements, even where there is a clear prejudice to landlords.

Pre-packs are legal and growing in popularity, however it`s clear that landlords will still face potentially difficult or unsatisfactory resolutions, unless they take proactive steps to ensure their assets are suitably protected.


For further information contact Phillip Parker at Brabners Chaffe Street on

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