Pump Court Chambers

Commercial Leases & Insolvency – An Overview

Blog 26th May 2020
Christopher Wilkins

With many businesses large and small struggling to survive or collapsing into administration or liquidation landlords are particularly vulnerable to rent arrears and the difficulty of finding a suitable tenant to replace the existing. The following is an overview of what steps a landlord can take in this uncertain world.

Remedies Available to a Landlord

Forfeiture

Most leases contain a forfeiture clause entitling the landlord to recover possession of the premises where there are arrears of rent or breaches of other covenants. Forfeiture is effected by peaceable re-entry or court proceedings.

However, the Coronavirus Act 2020 has effectively prevented landlords from obtaining possession before the end of June 2020 (at least) in existing proceedings or from taking any action to enforce a right of re-entry for non-payment of rent before that date if there are no proceedings already on foot (see separate note).

The Coronavirus Act only applies to forfeiture for non-payment of rent so other breaches can still be enforced by forfeiture. A notice under section 146 LPA 1925 is required in all cases apart from arrears of rent which must give the tenant an opportunity to remedy the breach.  There are complicated issues associated with waiver of the right to forfeit and tenants, sub-tenants and mortgagees can apply for relief from forfeiture. Relief is automatic if rent and costs are paid where forfeiture is enforced by court proceedings.

 

Distraint

Allows a landlord to remove goods belonging to the tenant from the leased premises to the value of the rent arrears subject to certain exceptions such as tools of the trade.

In practice a walking possession agreement is usually agreed giving the tenant a specified number of days to pay before the goods are seized.

Sub-tenants can be required to pay rent direct to the landlord by service of a notice pursuant to section 6 of the Law of Distress (Amendment) Act 1908

Technically complex (for the Bailiffs, although they know what they are doing) but an effective and relatively cheap remedy. However, as matters stand, bailiffs have to all intents and purposes ceased all enforcement action for the duration of the lockdown.

 

Court Proceedings

Broaden the assets against which judgment can be enforced and the scope of the covenants that can be enforced. Although bailiffs have ceased enforcement action, a judgment would allow the landlord to take advantage of other enforcement options such as a charging order if there is a property to be charged and third party debt orders.

Winding or bankruptcy is also an option but note (1) that the courts are disinclined to see the insolvency procedures being used simply for debt collection purposes and (2) see below as to how a successful petition limits the landlord’s remedies. See also Re Wanda Modes Ltd [2002] 1BCLC 289.

 

Guarantors and Former Tenants

Former tenants may be liable either under an authorised guarantee agreement provided on assignment to the current tenant or as the original covenantor. There may also be a third party guarantee given on grant or assignment of the lease. Court proceedings can still be brought and a judgment gives enforcement options.

Underleases granted before 1 January 1996 original tenants (and any previous tenants who provided direct covenants to the landlord) will remain liable for the rent. The landlord is required to serve a section 17 notice on a former tenant within 6 months of the date the sum demanded fell due or lose the right to claim. Anyone served with a section 17 notice can call on the landlord to grant it an overriding lease.

 

Rent Deposits

It is worth checking the terms of the lease relating to the deposit. Many allow the landlord to recoup rent arrears from the deposit before the end of the term and then place an obligation on the tenant to make good the shortfall failing which the landlord can seek to enforce that obligation by court action. Even if the lease does not expressly provide for it to be used and recouped, see below in relation to the construction of a rent deposit as security which may allow the landlord to use the rent deposit.

 

Insolvency Procedures and their Effect

The following is for now subject to the provisions of the Coronavirus Act 2020 relating to forfeiture.

 

Administration

The underlying purpose of an administration is to rescue the company as a going concern or to realise its assets for the benefit of creditors.

An Administrator therefore enjoys a complete stay of all proceedings against the company for the duration of the Administration.

A landlord accordingly must obtain permission from the court before commencing

  • Distress
  • Forfeiture by either means[1]
  • Execution or other proceedings

An Administrator who continues to use the tenant’s premises will generally be liable to pay the rent which is treated as an expense of the Administration and payable in priority to the Administrator’s own remuneration (Rule 2.67 Insolvency Rules 1986 as amended). The rent is payable pro rata not quarterly.

If the Administrator is not deriving any benefit from the premises then the court is likely to give a landlord permission to enforce its remedies although in practice negotiating a surrender with the Administrator is the best commercial solution.

Administration does not prevent the landlord serving a section 6 notice of using a rent deposit (if it creates the appropriate security).

 

Voluntary Liquidation

No leave is required for court proceedings but an application can be made to court to stay proceedings under IA 1986 section 112 (liquidator may apply to the court to determine any question or to exercise and power the court might exercise if the company were being wound by the court) and section 126 (power of court in a compulsory winding up to stay or restrain any action or proceedings against the company).

There is no bar on forfeiture by peaceable re-entry.

 

Compulsory Liquidation

Leave is required for forfeiture by proceedings; IA section 130(2):

“…when a winding up order has been made or a provisional liquidator has been appointed no action or proceeding shall be proceeded with or commenced against the company or its property except with leave of the court…”

In the light of Re Lomax Leisure and Ezekiel v Orakpo it seems probable that s.130(2) does not apply to forfeiture by peaceable re-entry. Section 130(2) was not amended by IA 2000.

 

Bankruptcy

Presentation of a petition does not affect the landlord’s right to forfeit although the court can stay any action under IA s.285(1).

Once an order has been made leave of the court is required for certain proceedings, s.285(3):

“After the making of a bankruptcy order no person who is a creditor of the bankrupt in respect of a debt provable in the bankruptcy shall-

  • have any remedy against the property or person of the bankrupt in respect of that debt, or
  • before the discharge of the bankrupt, commence any action or other legal proceeding against the bankrupt except with the leave of the court….”

Peaceable re-entry does not fall within s.285(1); Razzaaq v Pala. There is a suggestion that forfeiture by proceedings requires leave. However this is inconsistent with the analysis that forfeiture is not a remedy against the property or person of the bankrupt and Ezekiel v Orakpo.

 

Receivership

There is no bar on forfeiture (or other remedy) in a receivership.

 

Voluntary Arrangements

In the case of a CVA section 1 of the IA 2000 and in the case of an IVA section 252 afford protection from a landlord’s remedies for the duration of the moratorium or interim order. S1 prevents forfeiture and s3 of the IA 2000 prevents forfeiture during an interim order without leave.

The effect of a CVA or IVA on a landlord’s right to forfeit is controversial and a landlord would be well advised to seek clarification of whether the proposal is intended to affect the right to forfeit and if it does to challenge it as unfairly prejudicial.

It has also been held by the court of appeal that a VA can affect a landlord’s rights against co-tenants, previous tenants and sureties if such an effect is apparent on a true construction. If a landlord is faced with such a proposal he should challenge it as unfairly prejudicial. It is legitimate for the arrangement to release the insolvent tenant from liability to others but there is no reason why the arrangement should also secure the release of solvent co-debtors by a side-wind.

 

Rent Deposits

  • A rent deposit is likely to be treated as a charge although registration is probably not necessary.
  • provided that the rent deposit is properly worded it should enable the landlord to draw on the deposit for rent falling due after the tenant’s liquidation.
  • The rent deposit deed can reserve a right to forfeit if the tenant defaults in his obligations under the Deed, such as to top up the deposit if drawn on.
  • It is unclear whether drawing down on a rent deposit would operate as a waiver of accrued once and for all breaches of covenant committed prior to the rent day.
  • It is likely no draw down may take place pending an application for Administration or once the order has been made without leave because it is a stepo to enforce any security over the company’s property and because the tenant retains the equity of redemption the deposit remains its property in equity.

 

Transactions at an Undervalue

Section 423 IA 1986.

Might be applicable if the tenant has so arranged its affairs to avoid enforcement of the lease.

Points to bear in mind:

  • Consider all the consideration actually provided even if under a linked agreement; Phillips v Brewin Dolphin Bell Lawrie
  • Regard may be had to subsequent events
  • The giving of security is not a transaction at an undervalue
  • A transaction designed to reduce the claims of one creditor even if the debtor’s overall asset position remains unaffected.
  • Prejudicing creditors need only be a substantial purpose of the transaction, not the dominant purpose.

 

Disclaimer

A liquidator (voluntary or compulsory) or a trustee in bankruptcy may disclaim the lease under IA section 178-9 and IA 315-317. The Crown can also disclaim a lease where it vests in it as bona vacantia.

 

No-one else can.

There is no time limit unless a person interested in the property imposes a 28 day time limit within which the liquidator or trustee must elect, !A s.178(5) and IA s.316. The court has a limited power to extend time. If a trustee does not disclaim after a notice to elect he becomes personally liable because the lease vests in him. A liquidator does not become personally liable but may be treated as having adopted the lease for the benefit of the liquidation in which case rent is payable as an expense of the liquidation.

 

Effect of Disclaimer

A disclaimer: “….operates so as to determine from the date of disclaimer the rights interests and liabilities of the company/bankrupt in or in respect of the property disclaimed; but does not except so far as is necessary for the purpose of releasing the company/bankrupt from liability affect the rights or liabilities or others”

Hindcastle v Barbara Attenborough Associates provides a comprehensive analysis of the effect of a disclaimer and the principle that third party rights and liabilities are to be affected as little as possible.

  • Original Tenant/Assignee. The original tenant will continue to be liable but will lose any right of indemnity against the insolvent tenant. The position is the same for an assignee.
  • Rights against the insolvent tenant end if the lease is disclaimed. If the subtenant performs the tenant’s obligations under the lease the landlord cannot eject the subtenant.
  • Continues to be liable and loses his right of indemnity. Landlord can often require the guarantor to take a lease.
  • A legal charge survives disclaimer subject to paying the rent.

 

Vesting Orders

Section 181 and 320 IA 1986 provide that any person who claims an interest in the disclaimed property or any person who is under any liability in respect of the disclaimed property which is not discharged by disclaimer may apply to court for an order vesting the disclaimed property either in the person entitled to it or any person under a liability in respect of it.

In addition in bankruptcy any person in occupation of a dwelling house at the time the petition was presented may apply: IA 1986 s320(3)(c).

 

Time limit – 3 months

The landlord retains the same rights as he would have had but for the disclaimer and can make an application that the lease vest in any sub-tenant or mortgagee so putting them to their election to either take a vesting order or to be barred from all interest in the property. The landlord cannot however, take a vesting order giving him the lease and the benefit of a sub-lease.

It seems likely that a purchaser or an option holder has the right to seek a vesting order because both a contract for sale and an option create an immediate proprietary interest in the land.

 

Summary

Options Administration Voluntary Liquidation Compulsory Liquidation CVA/IVA
Distraint No Possible Leave required No if moratorium or interim order in place
Forfeiture by proceedings

(subject to the Coronavirus Act)

Leave required Possible Leave required No if moratorium or interim order in place
Forfeiture by peaceable re-entry (as above) Leave required Possible Leave required No if moratorium or interim order in place
Proceedings Leave required Possible Leave required No if moratorium or interim order in place

[1] Until 2 April 2001 when section 9 of the IA 2000 came into force forfeiture by peaceable re-entry did not require permission – Re Lomax Leisure [2000] CH 502

 

This article on Commercial Leases & Insolvency was written by Christopher Wilkins. For further on how to instruct Christopher or another member of the Property team please contact our clerks via the switchboard on 020 7353 0711 or via email: clerks@pumpcourtchambers.com

Home
Shortlist close
Title Type CV Email

Remove All

Download


Click here to email this list.