Landlord leasing offices with upwards-only rent review clause – Rent due under lease being higher than rent obtainable on open market – Tenants entering voluntary liquidation – Liquidators disclaiming lease – Extent of loss or damage payable to landlord by tenants’ liquidators – Whether discount for early payment – Judge holding landlord entitled to prove £1,053,000 – Appeal allowed
On January 9 1990 the landlord granted a lease of offices at 48 Gray’s Inn Road, London WC1, to Park Air Services plc (the company). The lease was for a term of 25 years from September 29 1989 at an initial rent of £140,000 pa for three years rising to £160,000 in the fourth and fifth years and with upward-only rent reviews at five-yearly intervals thereafter. By 1994 the rent payable under the lease was four or five times the rent which would have been obtainable in the open market. In December 1994 the company entered into members’ voluntary winding up and the appointed liquidators gave notice of the disclaimer of the lease under section 178 of the Insolvency Act 1986
A dispute arose about section 178(6) of the Act which stated: “Any person sustaining loss of damage in consequence of the operation of a disclaimer under this section is deemed a creditor of the company to the extent of the loss or damage and accordingly may prove for the loss or damage in the winding up”. The issue was in relation to the amount of the landlord was entitled to prove. The liquidators rejected the amount which had been submitted by the landlord and the landlord appealed and submitted a revised claim for a sum of £3.5m or alternatively £2.8m. The judge held that the landlord was entitled to prove the sum of £1,053,000 plus interest, calculated by taking the value of the rent, rates and other sums payable by the tenant during the residue of the term with a “market risk rate” being applied in order to ascertain the current worth of payments due in the future, less the rent which could be realised by reletting the property at the market rate again subject to the “market risk rate”. The landlord appealed.
Held The appeal was allowed.
1. The judge had been wrong to apply the market risk rate because it did not give effect to the statutory right of the landlord to prove in liquidation that, but for the disclaiming of the lease, he would have had a continuing contractual right to receive rent for the residue of the lease subject only to the landlord’s duty to mitigate the loss during the residue by reletting the property.
2. The judge had wrongly held that r 11.13(3) of the Insolvency Rules 1986 did not apply to the landlord’s claim for loss and damage under section 178(6) of the Insolvency Act 1986. Under that rule the landlord was entitled to be paid the full amount of the future rent reserved by the lease, less the credit which had to be given for the amount of rent obtainable by the landlord on reletting in the open market after the lease had been disclaimed. Therefore no statutory discount was applicable to the landlord’s proof for future rent.
Terence Etherton QC and Peter Griffiths (instructed by Memery Crystal) appeared for the landlord; Richard Adkins QC and Edward Cole (instructed by Lawrence Graham) appeared for the liquidators.
