Companies, Partnerships and Directors
Buying property from a company in administration
In the current financial climate, it has become more common for companies to have to sell their premises where they have become insolvent. Whilst such opportunities may appear attractive, it is important for prospective buyers of premises to understand what happens to a property that is the subject of an insolvency procedure and what the risks are in purchasing premises from a company in administration.
What is administration?
Where a company goes into administration an administrator will be appointed to take control of the company’s affairs from the directors. The aim of the administrator is to protect the interests of the insolvent company’s creditors and to promote rescue and recovery so that the company can continue to trade. However, if the administrator does not consider it to be reasonably practical to rescue the company he must then sell off the company’s assets, such as the premises, in order to repay the creditors.
What are the administrators’ powers?
Administrators must be qualified insolvency practitioners and usually more than one is appointed to act jointly as an agent for the insolvent company. They are either appointed by the court, by the directors of the insolvent company or by a mortgagee. Administrators are impartial and must act in good faith.The administrators have wide powers under the Insolvency Act 1986, which includes the power to sell property and so can enter into contracts with third parties. They can sell property free of floating charges, but not fixed charges. However they can sell property subject to fixed charges, such as mortgages, if this promotes the administration process and the proceeds of sale are repaid to the mortgagee.
What are the risks of buying property from an insolvent company?
Administrators will not accept any personal liability and consequently the sale of property will not be supported by any warranties. For example there can be no warranty that the property is not sold subject to any charges other than those that feature on the registered title. Further, the administrator will not provide the usual replies to property enquiries. This means that the usual due diligence procedure for this type of property transaction is limited. It is less risky if you are buying property where the title is registered. In this situation, the title is guaranteed at the land registry by the government. You may still inherit problems which could include breach of planning conditions, property tax that has not been paid and any other pre-sale liabilities, such as land contamination. Also, an administrator will not be responsible for business rates on empty premises and so a vacant property will be subject to outstanding rates which you will have to pay.
How do you manage the risk?
Your solicitor should check that the administrators have been formally appointed. This is a requirement of the land registry and a copy of the registered appointment must be provided when you register the property. You must ensure that your purchase of the property is in good faith and at an "arms length" basis, as this will reduce the risk of the transaction being voided. This can happen if it is suspected that there is foul play, for example if the property was sold at an undervalue. Your solicitors must carry out as much due diligence as is possible. You may need to carry out further searches over and above what a standard property transaction would require so that you obtain the most information available. Other considerations are required in other insolvency situations such as liquidation or receivership. If you are considering buying property from an insolvent company you are recommended to take legal advice.