Issues for any Statutory Code

Recent reports concerning the future of Punch Taverns and the question of tenants’ deposits are very likely to have alarmed many tenants and, indeed, many pub companies.  Punch Taverns Executive Chairman has been quoted as saying that while it was “technically possible” for members of the wider Punch Group to be subject to administration proceedings “the commercial reality” is that it would be in the interests of any administrative receiver to return partners’ security deposits.  Leaving aside the juxtaposition in the press reports of the words “administration” and “administrative receivership” this is a statement that is not likely to have provided much reassurance, if any, to tenants who are worried about the safety of their deposits. This is likely to have been made worse by a report  on 12th February that Punch takes the view that it would not be in the interests of a receiver to act in a way “prejudicial” to the tenants.

Is there a problem? There probably is. At the heart of the issues for tenants’ deposits lie two very important concerns:

1. For a landlord the first concern is to ensure that he has first call on the tenant’s deposit in order to satisfy the tenant’s liabilities to the landlord under the lease and that the deposit is not taken by a liquidator/administrator/receiver/trustee in bankruptcy of the tenant in satisfaction of other liabilities.
2. For a tenant the particular concern is to ensure that if he complies with his lease term then he can get his deposit back at the expiry of his tenure and, in particular, that any liquidator/administrator/receiver/trustee in bankruptcy of the landlord cannot require that the deposit is applied in satisfaction of the landlord’s other liabilities.

For the purposes of this note I will deal only with the second on these concerns.  Suffice it to say there is some quite complicated law behind all of this but we can extract the following for the purposes of this commentary:

1. So far as I can see, bearing in mind it is 108 pages long(!), the Punch Taverns Code of Practice does not provide any particular requirements for “ring fencing” the deposits although individual tenancy agreements may do.
2. Readers might be surprised to hear that IFC version 6 does not appear to include any provision for safe guarding tenants’ deposits.
3. There is no express statutory protection for pub tenants’ deposits (by way of comparison tenants of residential properties do have a variety of statutory protections). It is, though, legally possible for pub companies to safeguard tenants deposits
4. It is worth saying, at this stage, that there has been quite a lot of wild speculation about the future of Punch and it is not known to the writer, at the time of writing this article, what the outcome will be.  It may be that the solution will not involve administrative receivership or administration and further comment will be available when there is more news.
5. It has been common practice, for many years, in the sector, for tenants’ deposits to be paid over to the landlord and used by the landlord as part of their own money.  Indeed, many tenancy agreements expressly provide that the relationship of landlord and tenant, in relation to those deposits, will be that of debtor and creditor and the implication of this is that the tenants will only be able to claim in the liquidation or bankruptcy of the landlord in the same way as other creditors.  This has not always been the practice for all operators and this writer remembers when Whitbread ran a tenanted or leased estate they did ensure that the deposits were paid into separate accounts at a bank or building society.  This has not been common practice in recent times.
6. If the landlord does go into administration and the tenancy or lease comes to an end the tenant cannot enforce repayment of the deposit by the landlord in administration without the leave of the Court.  If, however, the lease has not come to an end then the entitlement to receive the deposit back may not have arisen.  If the administrator sells the property, subject to the lease or tenancy, to a third party then it is likely that, if there is a contractual obligation on the part of the original landlord contained in the lease, the new owner will be obliged to repay the deposit to the tenant on the due date in accordance with the lease or tenancy terms.

The writer is not aware of this having been an issue in the Consultation, but it probably will be now!

This article was written by Peter Holden. To contact him, call 07880 745028 or email peter.holden@freeths.co.uk