Landlord and tenant — Forfeiture — Section 10(1)(b) Insolvency Act 1986 — Whether right of re-entry security over a lease — Whether landlord secured creditor — Whether landlord entitled to forfeit lease held by tenant company where administration petition presented
By a lease dated 4 December 1998 Lomax Leisure Ltd
(the company) were granted a building lease by RAT Holdings Ltd of premises in
respect of which the company had incurred, and was intending to further incur,
expenditure on their conversion to a nightclub. However, by March 1999 the
total cost of the works had risen to £3.4m and the company faced a cash crisis.
In April 1999 Lomax Car Parks Ltd (the petitioner), which had provided the
company with some £185,000, petitioned for an administration order on the basis
that unless the company’s business were sold to a party capable of funding the
works, the lease would be forfeited and the company would inevitably go into
liquidation. On 14
by peaceable re-entry on the grounds of rent arrears and various breaches of
covenant. At the hearing, the petitioner contended that the forfeiture of the
lease was precluded by section 10(1)(b) of the Insolvency Act 1986.
was granted. It is open to a landlord to re‑enter peaceably on premises
demised to a tenant the subject of an administration order or petition. A right
of forfeiture is not security over a lease, and a landlord is not a secured
creditor. Accordingly, the landlord effectively forfeited the lease by
re-entry. The administration order would be made. The application for relief
from forfeiture was adjourned.
The following cases are
referred to in this report.
AGB Research plc, Re [1995] BCC 1091
Atlantic Computer Systems plc (No 1), Re [1992] Ch 505; [1992] 2 WLR 367; [1992] 1 All ER 476; [1991] BCLC
606
Billson v Residential
Apartments Ltd [1992] 1 AC 494; [1992] 2 WLR 15; [1992] 1 All ER 141;
[1992] 1 EGLR 43; [1992] 01 EG 91, HL
Bristol Airport plc v Powdrill [1990] Ch 744; [1990] 2 WLR 1362; [1990] 2 All ER
483, CA
Clarke (Richard) & Co Ltd v Widnall [1976] 1 WLR 845; [1976] 3 All ER 301; [1977] 2
EGLR 49; (1976) 243 EG 667, CA
Doorbar v Alltime
Securities Ltd [1996] 1 WLR 456; [1996] 2 All ER 948; [1996] 2 EGLR 33;
[1996] 32 EG 70
Doorbar v Alltime
Securities Ltd (No 2) [1995] BCC 728
Exchange Travel Agency Ltd v Triton Property Trust plc [1991] 2 EGLR 50; [1991] 35 EG
120; [1991] BCC 341
Ezekiel v Orakpo
[1977] QB 260; [1976] 3 WLR 693; [1976] 3 All ER 659; [1976] 2 EGLR 47;
(1976) 239 EG 501, CA
Gill v Lewis [1956]
2 QB 1; [1956] 2 WLR 962; [1956] 1 All ER 844, CA
Harris Simons Construction Ltd, In re [1989] 1 WLR 368
Howard v Fanshawe
[1895] 2 Ch 581
Jobson v Johnson
[1989] 1 WLR 1026; [1989] 1 All ER 621, CA
March Estates plc
v Gunmark Ltd [1996] 2 EGLR 38; [1996] 32 EG 75; [1996] 2 BCC 1
McMullen & Sons Ltd v Cerrone [1994] 1 EGLR 99; [1994] 19 EG 134; [1994] BCC 25
Olympia & York Canary Wharf Ltd, Re [1993] BCC 154
Park Air Services, Re [1999] 1 All ER 673; sub nom Christopher Moran Holdings Ltd
v Bairstow [1999] 1 EGLR 1; [1999] 14 EG 149
Razzaq v Pala [1997]
1 WLR 1336; [1997] 2 EGLR 53; [1997] 38 EG 157; [1998] BCC 66
Re A Debtor 13A 10 of 1994 [1996] BCC 57
Wadman v Calcraft
(1804) 10 Ves Junior 768
This was a hearing of a
petition for an administration order in relation to Lomax Leisure Ltd upon the
application of Lomax Car Parks Ltd, to which RAT Holdings Ltd objected.
George Bompas QC and Peter Shaw (instructed by
Penningtons) appeared for Lomax Car Parks Ltd; Jane Giret (instructed by
Paulley & Co) represented RAT Holdings Ltd.
Giving judgment, NEUBERGER J said:
Introduction
This application raises, among other points, a
difficult and not unimportant point on which there is conflicting authority,
namely whether it is open to a landlord to forfeit a lease by peaceable
re-entry when the tenant is a company in administration or in respect of which
an administration petition has been presented.
Facts
The facts, which I take substantially from the
skeleton argument prepared by Mr Peter Shaw, of counsel, are as follows.
The petitioner, Lomax Car Parks Ltd (Car Parks)
applies: first, for an administration order in respect of the business assets
and affairs of Lomax Leisure Ltd (the company); second, that Mr Nicholas John
Miller, an insolvency practitioner, be appointed as administrator; and, third,
that upon making the administration order, the company be granted relief from
forfeiture in respect of a lease (the lease) granted by RAT Holdings Ltd (RAT)
to the company on 4 December 1998 of premises at 77a and Vaults, Charterhouse
Street, London EC1 (the premises).
The company was formed for the purpose of
acquiring a lease of the premises and developing them for use as a nightclub.
The shareholders are six individuals, one of whom, Ralph Munding, is a director
of RAT, and another of whom, Mr Dominic Sullivan, is a director of Car Parks.
In April 1998, in anticipation of the grant of the
lease, the company entered into a contract with Marapaul Southern Ltd (Marapaul)
with a 21-week construction programme for works (the works) to convert the
premises into a nightclub. The contract sum was £1.4m. The funding was to be
provided from shareholders’ funds, a brewery loan and a loan from the company’s
bank, National Westminster Bank (NWB).
There were various delays to the development,
largely because it turned out that the ultimate freeholder of the site was not
London Underground Ltd (LUL), RAT’s landlord, but LUL’s landlord, the
Corporation of London, from whom consents for the works and for the change of
use were required, and also because Marapaul became insolvent and entered into
a creditors’ voluntary arrangement. In addition to these problems, NWB
considered that the lease offered inadequate security, and was not prepared to
lend money unless certain of its provisions were amended.
By November 1998 all the shareholders’ existing
funds had been exhausted and they were asked to provide further loans. All of
them, apart from Mr Munding, complied. On 4 December 1998, after all the terms
had finally been agreed, the lease was granted. The provisions of the lease
were what one might expect in a modern building lease of commercial premises.
Thus, the company covenanted with RAT to carry out the works by a certain date
in September 1999; to keep RAT informed of certain matters; to effect certain
insurances; and not to assign the lease until the works were completed. The
lease also contained a proviso for re-entry in the event of non‑payment
of rent or breach of covenant on the part of the company.
At around the same time, namely December 1998, the
company required yet further funds to meet the ongoing cost of the works. In
the absence of any further moneys from the shareholders, Car Parks contends
that it advanced to the company over £165,000 between December 1998 and March
1999, and a further £20,000 on 8 April 1999.
In March 1999, Marapaul was replaced as contractor
by Blenheim House Contractors (Blenheim). The total cost of the works had now
risen to over £3.4m.
The present position, described in Mr Sullivan’s
affidavit of 9 April 1999 and the r 2.2 report prepared by Mr Miller, is that
there is an immediate cash crisis in the company. It has no further funds.
There are arrears of rent (including interest and VAT) due to RAT in the sum of
£116,000, and one stage payment is currently due to Blenheim. Last month, one
of the investors, who I have not so far mentioned, Mr
offered to advance substantial further sums to the company to enable it to
complete the works. This offer was made on the basis that the shareholding
structure be revised in order to reflect Mr
No agreement to that effect was reached between the shareholders; although the
majority of them, including Mr Stamp and Mr Sullivan, supported the proposal, a
minority, including Mr Munding, did not.
On 7 April 1999, Car Parks issued the instant
petition for an administration order on the basis that, unless the company’s
business is sold to a third party capable of funding the works, the lease would
be forfeited and the company would inevitably go into liquidation. Following
the issue of the petition, RAT purported to forfeit the lease by peaceably
re-entering on the premises on 14
arrears of rent, and also on the basis of eight other different breaches of
covenant that had been specified in a notice, pursuant to section 146 of the
Law of Property Act 1925, served on the company by RAT on or about
19
Issues
Car Parks proposes that an administration order be
made initially for a limited period of two months. The primary purpose of the
order would be to allow attempts to be made to sell the business or assets of
the company, including, in particular, the lease. Mr Stamp has already put the
proposed administrator in funds to the extent of £250,000, with a view to
discharging the arrears of rent (which expression includes interest and VAT)
and also to meet the ongoing cost of the works for the two-month period. He is
also proposing, and prepared to undertake, to advance a further £150,000 to the
proposed administrator. This will enable the costs of the administration and
other outgoings, such as professional fees and contingencies, to be met for the
two-month period. As I understand it, it is envisaged that Mr Stamp would have
a priority claim to repayment of the £400,000 if and when the business or
assets are sold.
Car Parks suggests that there is a realistic
prospect that the business may be sold, and, indeed, Mr Stamp has indicated
that he would propose to form a new company through which he would make an
offer for the acquisition of the company’s assets, including the lease, to
enable the works to be completed. It may well be that some of the other
shareholders will have an interest in the new company.
It is appreciated by Mr George Bompas QC, who
appears with Mr
until the works are complete, but he points out that this would not prevent the
administrator from entering into a sale of the business and an agreement to
assign the lease once the works are completed.
It appears to be of importance for commercial
reasons that the nightclub should open by September 1999 in order to take
advantage of the projected millennium celebrations. It is also said that a sale
of the business would need to be concluded swiftly.
RAT, the landlord, has not only purported to
re-enter peaceably; it has also presented a petition to wind up the company on
the ground that it has not paid the rent and is insolvent. The winding-up
petition was presented on 16 April and is due to be heard on 9 June.
The issues raised by the arguments by Miss Jane
Giret, who appears for RAT, are as follows:
1. Has Car Parks the necessary status to make the
application to present the petition and seek appointment of an administrator?
2. Has RAT validly re-entered the premises?
3. Ought the administration order be made?
4. If RAT has validly re-entered, and the
administration order ought to be made, is it appropriate to give relief from
forfeiture at this stage?
I shall deal with those four questions in turn.
Status of Car Parks
Section 9(1) of the Insolvency Act 1986 (the 1986
Act) provides:
An application to the court for an administration
order shall be by petition presented either by the company or the directors, or
by a creditor or creditors…
The evidence in support of the contention that Car
Parks is a creditor, is to be found in two affidavits of Mr
exhibits thereto. I conclude, on the evidence, that Car Parks is a creditor of
the company, and, hence, is entitled to petition for an administration order.
This is because I am satisfied that it advanced money to the company, that the
money was not advanced as a gift and, as no other term was agreed, it was a
loan that is repayable on demand. First, this is what Mr
a director both of Car Parks and of the company, says on oath. Second, it is
clear that the sums of money to which he makes reference have been paid to the
company, as can be seen from its records. Third, it is clear that Car Parks
gave written instructions to its bankers to transfer at least £75,000 in two
tranches to the company; there is no reason to think that instructions to pay
the other sums were not given orally. Fourth, while it is true that some of
these payments made to the company are entered in the company’s records in a
column referring to ‘loans by shareholders’, it is equally clear that some of
the sums are entered under ‘loans from non-shareholders’. I am satisfied that
the entries under the ‘loans by shareholders’ column are due to an
understandable mistake, given Mr Sullivan’s close connection with Car Parks.
Miss Giret relied on a letter written by Mr Stamp,
which she said suggested that the sums now said to be advanced by Car Parks
were actually part of Mr Sullivan’s contribution to the company, and, indeed,
part of his equity contribution. I do not believe that that letter assists
RAT’s case. First, the letter was written for the purpose of making a proposal
as to future shareholdings if Mr Stamp made his contemplated contribution to
the company; it did not purport to be a record of the then current position.
Second, it is clear that the entry in the letter against Mr
in any event, something of a shorthand reference, because part of the money
attributed to him is certainly his girlfriend’s; it could well be equally true
that another part of the money attributed to him is that of Car Parks.
Miss Giret, albeit very shortly, also sought to
argue that, in any event, Car Parks was not entitled to petition because any
loans would have been advanced in breach of a shareholders’ agreement. There
are three separate answers to that. The first is that neither RAT, which seeks
to enforce the shareholders’ agreement for this purpose, nor Car Parks, against
whom it is sought to be enforced for this purpose, was a party to the
shareholders’ agreement. Second, while I do not pretend the point is clear
beyond doubt, I agree with Mr Bompas that, even if this were a point that could
be taken by RAT against Car Parks, there is no breach of the shareholders’
agreement. Third, the mere fact that there was a breach of a shareholders’
agreement would not prevent Car Parks being a creditor within the meaning of
section 8(1) of the 1986 Act.
Landlord’s purported re-entry
I turn to the second question, which is of some
interest and difficulty, namely whether it was open to RAT to effect forfeiture
of the lease by peaceable re-entry at a time when the petition for
administration had been presented in respect of the company. Section 10(1) of
the 1986 Act provides:
During the period beginning with the presentation
of a petition for an administration order and ending with the making of such an
order or the dismissal of the petition —
(a) no resolution may be passed or order
made for the winding up of the company;
(b) no steps may be taken to enforce any
security over the company’s property, or to repossess goods in the company’s possession
under any hire-purchase agreement, except with the leave of the court and
subject to such terms as the court may impose; and
(c) no other proceedings and no execution
or other legal process may be commenced or continued, and no distress may be levied,
against the company or its property except with the leave of the court and
subject to such terms as aforesaid.
Section 11(3), in paras (a), (c) and
(d), has very similar provisions relating to steps that cannot be taken
once a company is in administration. Section 10(4) is in these terms:
References in this section and the next to
hire-purchase agreements include conditional sale agreements, chattel leasing
agreements and retention of title agreements.
I should also refer
to section 248, which applies to sections 10 and 11:
In this Group of Parts, except in so far as the
context otherwise requires —
(a) ‘secured creditor’, in relation to a
company, means a creditor of the company who holds in respect of his debt a
security over property of the company, and ‘unsecured creditor’ is to be read
accordingly; and
(b) ‘security’ means… any mortgage,
charge, lien or other security…
On behalf of Car Parks Mr Bompas argues that the
purported forfeiture on 14 April was precluded by section 10(1)(b)
because it was a step taken to ‘enforce… security over the company’s property’.
He advances four main arguments to support this
proposition. First, he says that a proviso for re-entry has always been treated
as being security for payment of rent and, indeed, he says in logic, for
performance of other covenants in the lease. In this connection,
Stirling
p586 an observation of Sir William Grant MR in Wadman v Calcraft
(1804) 10 Ves Junior 768, which is in the following terms:
The Plaintiff seeks to be relieved against a
forfeiture of this lease; which he states to have been incurred solely by
non-payment of rent; and if that is the ground of this ejectment, there is no
doubt equity will relieve against the forfeiture; considering the purpose of
the clause of re-entry to be only to secure the payment of rent; and that, when
the rent is paid, the end is obtained; and therefore the landlord shall not be
permitted to take advantage of the forfeiture.
The same point was made more recently in Richard
Clarke & Co Ltd
finds the following accurately recorded in the headnote:
the immediate right of re-entry… was to be
regarded as merely security for the payment of rent…
*Editor’s note: Also reported at [1977] 2 EGLR 49
Second, he says, it would be wholly inconsistent
with the whole thrust and purpose of the administration procedure if a landlord
could determine a lease vested in a company in administration, particularly in
a case such as this, where the lease is of the only premises from which the
company operates, and, indeed, represents the only substantial asset of the
company.
In that connection, Mr Bompas refers to
observations of Sir Nicolas Browne-Wilkinson V-C in Bristol Airport plc
v Powdrill [1990] Ch 744, where he said at pp758F-759A:
it may be helpful to state what, in my opinion,
is the correct approach to the construction of the provision dealing with
administrators contained in Part II of the Act. The judge was very much
influenced in his construction by the manifest purpose of Part II of the Act. I
agree with this approach. The provisions of Part II themselves, coupled with
the mischief identified in the Cork Report, show that the statutory purpose is
to install an administrator, as an officer of the court, to carry on the
business of the company as a going concern with a view to achieving one or
other of the statutory objectives mentioned in section 8(3). It is of the
essence of administration under Part II of the Act that the business will
continue to be carried on by the administrator. Such continuation of the
business by the administrator requires that there should be available to him
the right to use the property of the company, free from interference by
creditors and others during the, usually short, period during which such
administration continues. Hence the restrictions on the rights of creditors and
others introduced by sections 10 and 11 of the Act. In my judgment in
construing Part II of the Act it is legitimate and necessary to bear in mind
the statutory objective with a view to ensuring, if the words permit, that the
administrator has the powers necessary to carry out the statutory objectives,
including the power to use the company’s property.
Similarly, there are observations of Nicholls LJ,
giving the judgment of the Court of Appeal in Re Atlantic Computer Systems
plc (No 1) [1992] Ch 505: see, for instance, at pp528D, 528G-H and 530A-F.
Third, Mr Bompas points out that there is a line
of consistent and clear first instance authority to support the proposition
that a right to effect peaceable re-entry to forfeit a lease is a security
within section 10(1)(b) or (which is the same thing) within section
11(3)(c) of the 1986 Act.
First, there is the decision of Harman J in Exchange
Travel Agency Ltd v Triton Property Trust plc [1991] BCC 341*. He
referred to textbooks to support the proposition that, in the words of Halsbury’s
Laws 4th ed, vol 27 at p346, para 442, the proviso for re-entry on
non-payment of rent is regarded in equity as merely a security for the rent. He
then went on to refer to supporting authorities that I have mentioned, and said
at p345D-E:
The right to re-enter has always been regarded as
security, and that word has always been used to describe that right. It is a
way of securing the observance of a tenant’s obligations. So, also, when a
mortgagor charges his premises to a mortgagee, the mortgagee is entitled to sue
for his money under the covenant in the mortgage and is also entitled under the
right given by the mortgage to enter upon the premises for better security of his
debt. The analogies are, of course, not perfect, but they seem to me
sufficiently close to allow the reading of the words ‘other security’ in
section 248 to extend to cover the right to re‑enter peaceably conferred
by a proviso for re-entry in a normal lease.
*Editor’s note: Also reported at [1991] 2 EGLR 50
He also held that taking possession by peaceable
re‑entry also fell within section 11(3)(d), and therefore within
section 10(1)(c), on the grounds that it would be the commencement of
other legal process.
In Re Olympia & York Canary Wharf Ltd
[1993] BCC 154 Millett J took a different view on this second point (as to the
meaning of ‘legal process’); this was effectively the ratio of his
decision. However, although obiter, Millett J, after quoting from the
judgment of Harman
In my judgment the peaceable re-entry is a step
in the enforcement of the landlord’s security over the property of the tenant,
and if the tenant is a company in administration the taking of that step
requires the prior consent of the administrator or the leave of the court.
At the end of his judgment, he said at p158C:
Accordingly, I decline to follow Harman
J’s decision that a landlord’s peaceable re-entry amounted to the commencement
or continuation of legal process, although I respectfully agree that it
requires the consent of the administrator or the leave of the court under
section 11(3)(c) of the 1986 Act.
Third, there is Doorbar v Alltime
Securities Ltd (No 2) [1995] BCC 728, a decision of Knox J relating to a
different provision of the 1986 Act concerned with individual voluntary
arrangements: section 258(4). None the less, he referred to, and cited passages
from, the judgments in Exchange Travel and Olympia, and said at
p734E:
Consistently with those authorities, I consider
that Alltime’s right of re‑entry under the lease should be regarded as a
security which it holds over the debtor’s property. I do not accept the
argument advanced by Miss Tipples that the right of re-entry is one over the
property of Alltime and not over the property of the debtor. That seems to me
to be indistinguishable from the argument that was rejected by Harman J in the Exchange
Travel case.
His decision went to the Court of Appeal, see
[1996] 1 WLR 456*, where the point was touched on at the end of the judgment of
Peter Gibson LJ in a short paragraph at p468B-C. He recorded Knox J’s
conclusion in relation to the point, and said this about Knox J’s decision:
That is a conclusion with which I would not think
it right for this court to interfere, the judge having taken into account all
the relevant circumstances.
*Editor’s note: Also reported at [1996] 2 EGLR 33
I was also referred to Re AGB Research plc
[1995] BCC 1091. In that case, Vinelott J said at p1094D-E that Harman J and
Millett J had concluded that the words of section 11(3)(c) were, to use
the words of Vinelott J, ‘wide enough to comprehend the exercise of a right of
re‑entry by a landlord’. He then recorded that counsel did not seek to
contend to the contrary, although he reserved his right to do so in a higher
court.
Next, in Re A Debtor 13A 10 of 1994 [1996]
BCC 57, Rattee J had to consider whether re-entry by a landlord required leave
of the court where the tenant was subject to an interim order in a bankruptcy.
This turned on the construction of section 252(2)(b) of the 1986 Act. Agreeing
with Millett J and disagreeing with Harman J, and following a decision of Mr
Roger Kaye QC, McMullen & Sons Ltd v Cerrone [1994] BCC 25†,
Rattee J held that leave was not required because it was not ‘other
proceedings’ or ‘other legal process’ within section 252(2)(b). However,
he plainly accepted that the decision in Exchange Travel and the
reasoning in Olympia were right, because he emphasised that the
conclusion he reached was somewhat anomalous, in the sense that it was
different from that in the case of a company in administration because of the
provisions of section 11(3)(c) or section 10(1)(d) of the Act.
†Editor’s note: Also reported at [1994] 1 EGLR 99
Finally, Mr Bompas relied on the decision of March
Estates plc v Gunmark Ltd [1996] 2 BCC 1‡, where Lightman J
considered that, in relation to a voluntary arrangement under section 4(3) of
the 1986 Act, a landlord could re-enter peaceably without leave of the court,
following the reasoning, among others, of Knox J in Doorbar: see
pp7C-8A.
‡Editor’s note: Also reported at [1996] 2 EGLR 38
Fourth, Mr Bompas contends that while there is a
degree of inconsistency between the company insolvency regime, where, at least
on his case, whether a tenant is in liquidation or administration the landlord
cannot peaceably re-enter, and the personal insolvency regime, as demonstrated
by the closing passage in the judgment of Rattee J in Re A Debtor to
which I have referred, there is a consistency, if he is right, within the
different forms of company insolvency: a landlord can neither distrain nor
re-enter peaceably if the company is in administration or in liquidation, and
it would be anomalous if the position in administration differed from that in
liquidation.
Each of these arguments is strong, and, taken
together, they seem, on the face of it, overwhelming, particularly to a judge
at first instance. However, I have reached the conclusion that it is open to a
landlord to re-enter peaceably on premises demised to a tenant the subject of
an administration order or petition notwithstanding those four arguments. My
reasons are as follows.
First, albeit with diffidence in light of previous
decisions, I do not consider that it can be said, as a matter of ordinary
language or in the light of section 248 of the 1986 Act, that a landlord’s
right to forfeit a lease for non‑payment of rent or breach of covenant
can fairly be described as ‘security over the company’s property’. As a matter
of ordinary language, a right of forfeiture would not seem to me to be
security over the company’s property, ie security over the lease, and nor do I
think that it is security within the meaning of section 248(b) of the
1986 Act. It seems to me inaccurate to describe the landlord, whether as a
matter of ordinary language or within the definition of section 248(a),
as a ‘secured creditor’. Yet, if the right of re-entry is a security under
section 248(b), it seems to me to follow that the landlord would be a
secured creditor within section 248(a).
In Ezekiel v Orakpo [1977] QB 260*,
Shaw LJ, giving the judgment of the Court of Appeal, said at pp267H‑268A:
The action for re-entry is in the nature of an
action in trespass. It is not a remedy against the property of the debtor in
respect of a debt, notwithstanding that the occasion of the forfeiture is
default in payment of the rent reserved by the lease. The consequence of
forfeiture (subject to the power of the court to grant relief) is to determine
the lessee’s interest. It is not a remedy in forcing payment of the rent due…
*Editor’s note: Also reported at [1976] 2 EGLR 47
Having referred to the decision of Stirling J in Howard
v Fanshawe and set out the passage he quoted from the observation of Sir
William Grant, Shaw LJ continued at p268E:
This is not, in our view, to be understood as
meaning that the exercise of a right to forfeiture is a remedy against the
property of a debtor in respect of a debt. The purport of the passage quoted is
that since the objective of a power of forfeiture is to secure (in the sense of
to bring about) payment of the rent, once the rent is paid there is no reason
to uphold the forfeiture and relief should be granted to the lessee.
Later, at p269A-B, he said:
Stirling J [1895] 2 Ch 581, after citing other
authorities, said, at p588, that they appeared to him ‘to establish that the
ground on which courts of equity formerly gave relief was that the proviso for
re-entry was… simply a security for the rent.’ In the light of the passages
which precede it, the phrase, ‘security for rent,’ is not to be understood in
the strict legal sense as something equivalent to a mortgage as security for a
debt. It is rather a means of putting the lessee in the position that if he
does not pay the rent he will risk losing his lease.
I agree with what is said in Woodfall on
Landlord & Tenant vol 1 (loose-leaf edition) at para 17.181. Having
said in the text, ‘In the eyes of equity, the proviso for re-entry was merely a
‘security’ for the rent’, there is this footnote:
This is merely a metaphor, and should not be
interpreted as though the proviso for re-entry constituted a security in the
legal sense, for instance for the purpose of subrogation…
It cites Ezekiel. The footnote continues:
The significance of the metaphor appears to have
been overlooked in Exchange Travel…, which was not followed on this
point in Re Olympia… or Razzaq…
Razzaq is a case to
which I shall shortly refer. The footnote makes a minor error in saying that Exchange
Travel was not followed on this point in Olympia: on this particular
aspect, as I have said, Millett J approved Exchange Travel in Olympia.
To take the point a little further, the cases only
establish that the proviso for re-entry is treated as security on the cases for
non-payment of rent. There is no authority to suggest that it is treated in
equity or elsewhere as security for performance of the other covenants. One
sees the force of Mr Bompas’ argument that, as a matter of logic, if the
proviso for re-entry is to be treated as security for payment of rent, it must
also be treated as security for observance of other covenants. However, if it
is to be extended in that way, there is no reason in logic, as I see it, why a
proviso for forfeiture in respect of chattels should not equally be seen as a
security for the performance of the covenants by the hirer of the chattels.
Indeed, it has been established that forfeiture of chattels can be the
subject-matter of relief: see Jobson v Johnson [1989] 1 WLR 1026.
If that is so, then, if a proviso for forfeiture generally is a ‘security’, it
is hard to see why there is reference to repossessing goods in the company’s
possession under any hire-purchase agreement in section 10(1)(b) given,
as Miss
virtue of subsection (4) includes chattel-leasing agreements. Indeed, I note
that in Jobson itself, at p1044B, Nicholls LJ describes a right of
forfeiture as ‘security’ in inverted commas.
Second, while Ezekiel was concerned with
section 7 of the Bankruptcy Act 1914, which is not directly in point, it is
obviously significant in relation to the point at issue. It was not mentioned
in any of the first instance cases to which I have referred, with the exception
of March Estates, where it was cited to, and indeed referred to, by
Lightman J in relation to this point, albeit very briefly: see at p7C.
Certainly, it is hard to believe that Harman J would have expressed himself in
quite the terms that he did in Exchange Travel, if Ezekiel had
been cited to him.
Third, there is a first instance decision, more
recent than all the others to which I have referred, namely Razzaq v Pala
[1998] BCC 66*, a decision of Lightman J. That decision was not concerned with sections
10 or 11, but with section 285, of the 1986 Act, which in subsection (4) states
that its provisions do ‘not affect the right of a secured creditor of the
bankrupt to enforce his security’. The question was whether the right of
re-entry was a security. Had he followed his own reasoning in March Estates,
and the reasoning in the other first instance cases to which I have referred,
Lightman J would have held that it was security. However, as he said, he had
changed his mind. He said at p69G:
It is well established that the right of
re-entry, although often colloquially referred to as a security, is not a
security in the strict legal sense of the word…
*Editor’s note: Also reported at [1997] 2 EGLR 53
He then cited Ezekiel and other cases. At
p70A-D he said:
The threat to exercise, and the exercise itself
of, the right of re-entry may secure (in the sense to induce) the tenant to
fulfil the covenants in the lease, but is not a form of charge over the lease.
Where the right of re-entry is exercised as the sanction for non-fulfilment of
covenants, relief against forfeiture may be obtained if the tenant can and will
remedy the fault on the ground that (using the term in a colloquial sense) the
right of re-entry is only a ‘security’ to achieve this result.
He then referred to some of the cases at first
instance that I have mentioned, including his own decision in March Estates,
and said at p70F-G:
Notwithstanding the authorities referred to in March
Estates v Gunmark, it is now quite clear to me that the answer to
the question is in the negative and that for the purpose of s 383(2) the
landlord’s right of re-entry does not constitute a security. The scheme of the
Act confirms that the word ‘security’ is used in its strict legal sense.
He then dealt with provisions that relate to the
part of the 1986 Act with which he was concerned (not the part containing
sections 10 and 11 or 248). However, having come to that conclusion, he said at
p71A‑C:
I should add that materially similar
considerations apply in respect of s 248 of the Act in case of corporate
insolvency. Whilst a secured creditor may petition to wind up a company without
being required to express willingness to give up his security, he must put a
value on his security and only prove for the balance (see r 4.88 and 4.95 of
the Insolvency Rules 1986). Again such a procedure is totally inapposite
to a landlord’s right of re-entry. The word ‘security’ in s 11(3)(c) of
the Act therefore cannot include a landlord’s right of re-entry. On
reconsideration, I am of the view that in March Estates v Gunmark I
have so stated and declined to follow the ratio decidendi of Exchange
Travel Agency Ltd v Triton Property Trust plc [1991] BCC 341 and the
obiter dicta in the other authorities to the contrary effect. It would
appear that the dicta were uttered without full (if any) argument on the
question and that in none of those cases, or indeed in Exchange Travel,
was any reference made to the decision of the Court of Appeal in Ezekiel v
Orakpo or the statutory provisions to which I have referred. In this
case I have had the benefit of full and able argument from Mr Machell and Mr
Hutchings.
This authority demonstrates that the first
instance authorities no longer speak with one voice, and that careful
consideration of Ezekiel v
direction from that indicated by those earlier authorities.
Fourth, even more recently, in Re Park Air
Services plc [1999] 1 All ER 673*, the House of Lords had to consider the
basis upon which a landlord should be compensated where a liquidator of a
tenant in liquidation disclaims the lease. The issue, therefore, was rather
different from the one before me. None the less, in a passage of relevance to
the present case, Lord Millett, with whom the other members of the House of
Lords agreed, said at p681D-G:
the Court of Appeal regarded the landlord as a
secured creditor, his security taking the form of a right to re-enter and
recover possession for non-payment of rent and to distrain for unpaid rent… The
short answer to this is that a landlord is not a secured creditor within the
meaning of s 248 of the Insolvency Act 1986. Section 248 defines ‘secured
creditor’ as a creditor of the company who holds a security over the property
of the company. A secured creditor who does not realise or voluntarily
surrender his security must put a value on his security and prove only for the
balance as an unsecured creditor. None of these provisions is capable of
applying to the landlord’s right of re-entry. This is not a security interest
subsisting in the tenant’s property, nor is it capable of being realised by the
landlord. It does not secure the performance of the tenant’s liability to pay
rent, which remains unsatisfied as well as after re-entry as before. It cannot
be valued or surrendered. If the lease is disclaimed it is not voluntarily
surrendered by the landlord but brought to an end by the liquidator without his
consent. Once it is disclaimed, the right to re-enter is gone altogether with
the right to future rent payments of which it is supposed have secured.
It is a very curious security which is liable to
evaporate just when it is needed.
*Editor’s note: Also reported at sub nom
Christopher Moran Holdings Ltd v Bairstow [1999] 1 EGLR 1
To my mind, these observations appear to undermine
the basis upon which the reasoning of Harman J in Exchange Travel was
based, because he considered that the right of re-entry was a security within
section 248(b) of the 1986 Act; from that, it would seem to me clearly
to follow that the landlord was, in his view, a secured creditor within the
meaning of section 248(a). However, Lord Millett has said in clear terms
that the landlord is not a secured creditor within the meaning of section 248.
Furthermore, the observation in Ezekiel
that a right of re-entry ‘is not a remedy against the property of the debtor in
respect of a debt’, and Lord Millett’s statement that a right of re-entry ‘is
not a security interest subsisting in the tenant’s property’ are rather similar
in their terms to the way in which section 10(1)(b) is expressed —
‘security over the company’s property’.
Mr Bompas submits that I should not follow or
apply the observations of Lord Millett, and that they did not point to the
conclusion that I have suggested. First, he says that Lord Millett’s
observations were obiter. I do not accept that: they are a fundamental
part of Lord Millett’s reasoning for rejecting the view of the Court of Appeal
as he had explained it. Second, he effectively argues that Lord Millett had not
understood the reasoning of the Court of Appeal. It is not appropriate for me
to proceed on such a basis, even if I thought it was right (which I do not).
Third, he says that, for the purposes of sections 10 and 11 of the 1986 Act,
the word ‘security’ has a special meaning. Mr Bompas points quite rightly to
the fact that section 248 has an ‘escape provision’ in the words ‘in so far as
the context otherwise requires’. My answer to that point is threefold. First, I
do not consider that the context of sections 10 and 11 otherwise ‘require’.
Second, I do not consider it right to invoke these words to enable the word
‘security’ to be given an unnatural meaning, such as Mr
in my view requires. Third, in any event, in light of the strong observations
in Ezekiel, Razzaq and Park Air, I do not feel that I
should accede to the submission.
Fifth, I am, of course, very conscious of the fact
that my conclusion does seem to run counter to the purpose of an administration
order as explained, perhaps most clearly, by Sir Nicolas Browne-Wilkinson in Bristol
Airport. However, immediately after the paragraph that I have already
quoted, he said at p759A-B:
On the other hand, however desirable it may be to
construe the Act in a way calculated to carry out the parliamentary purpose, it
is not legitimate to distort the meaning of the words that Parliament had
chosen to use in order to achieve that result. Only if the words used by
Parliament are fairly capable of bearing more than one meaning is it legitimate
to adopt the meaning for which it gives effect to, rather than frustrates, a
statutory purpose.
Similar observations may be found in the judgment
of Rattee J in Re A Debtor [1996] BCC 57 at p66E, and in the judgment of
Lightman J in Razzaq [1998] BCC 66 at p71E. So far as the observations
in Atlantic are concerned, I accept that the general thrust of the
reasoning and observations of Nicholls LJ appear to have proceeded on the
assumption that a landlord cannot forfeit a lease, whether by proceedings or by
peaceable re-entry, when it is vested in a company in administration. However,
as Miss Giret submits, it was a case concerned with chattels and not with land.
No argument or submissions appear to have been directed towards the specific
question of whether it would be open to a landlord to effect forfeiture of a
lease by peaceable re-entry where the tenant is a company in administration.
In all these circumstances, with some regret, I
have come to the conclusion that the forfeiture in the present case, effected
as it was by peaceable re-entry, was effective. It is right to record that Mr
Bompas raised, for the purpose of preserving Car Park’s position should this
case go further, the alternative argument, which found favour with Harman J,
but has subsequently been rejected in Olympia, McMullen and Re
A Debtor, namely that a forfeiture by peaceable re-entry was precluded once
a petition had been presented on the grounds that it was other legal process.
Administration order
I now turn to the third question, namely whether I
should make the administration order sought. The relevant statutory provisions
are in section 8 of the 1986 Act. Section 8(1) provides:
(1) Subject to this section, if the court —
(a) is satisfied that a company is or is
likely to become unable to pay its debts (within the meaning given to that
expression by section 123 of this Act), and
(b) considers that the making of an order
under this section would be likely to achieve one or more of the purposes
mentioned below,
the court may make an administration order in
relation to the company.
The statutory purposes identified in section 8(1)(b)
are set out in section 8(3):
The purposes for whose achievement an
administration order may be made are
(a) the survival of the company, and the
whole or any part of its undertaking, as a going concern;
(b) the approval of a voluntary
arrangement under Part I;
(c) the sanctioning under section 425 of
the Companies Act of a compromise or arrangement between the company and any
such persons as are mentioned in that section; and
(d) a more advantageous realisation of the
company’s assets than would be effected on a winding up;
and the order shall specify the purpose or
purposes for which it is made.
There is no doubt that the requirements of section
8(1)(a) are satisfied: the company is unable to pay its debts. So far as
section 8(3) is concerned, the principal ground relied on by Mr Bompas is
section 8(3)(d). As an alternative, he presses, albeit not quite as
strongly, section 8(3)(a). In order to achieve either or both of those
purposes, it may, he accepts, be necessary at some point to have a voluntary
arrangement, and, therefore, he also relies on section 8(3)(b). He does
not, however, rely on section 8(3)(c), although it is one of the four
grounds referred to in the petition.
It is now well established that the court cannot
make an administration order unless it believes that there is a ‘real prospect’
of at least one of the aims set out in section 8(3) being achieved: see per
Hoffmann J in In re Harris Simons Construction Ltd [1989] 1 WLR 368
at p371.
At the moment, the company may be said to have no
assets, because the lease is forfeited following the peaceable re-entry
effected by RAT. However, the fact that there has been peaceable re-entry does
not mean that the company cannot get the lease back. Until recently, it was
believed that if a landlord lawfully and peaceably re‑entered upon
premises for breaches of covenant other than non-payment of rent, the tenant
could not get relief from forfeiture. That perceived injustice has been put
right by the decision of the House of Lords in Billson v Residential
Apartments Ltd [1992] 1 AC 494*.
*Editor’s note: Also reported at [1992] 1 EGLR 43
Car Parks’ case, as put forward in Mr Sullivan’s
affidavit and in the r 2.2 report, was predicated on the basis that the lease
is in existence, because, at the time of the affidavit and the report, the lease
had not been forfeited. One therefore has to qualify Car Parks’ original case a
little so that it is as follows. If the company gets relief from forfeiture, it
will have a valuable asset, namely the lease; it will have the opportunity of
continuing the contract with Blenheim; and, if it is in administration, it will
have a breathing-space within which to agree to assign the lease with the
benefit of the building contract, as a result of which there would be a
substantial sum to be realised for the benefit of creditors. The £400,000 from
Mr Stamp will enable RAT to be paid the whole of the arrears of rent until the
next instalment of rent is due (24
continued, the administration to be managed and other outgoings and contingencies
to be paid for the two-month period. This has a good prospect of resulting in a
substantial dividend for creditors. It is also possible that sufficient further
finance will be obtained to enable the company to trade successfully through
its difficulties.
On the other hand, it is said on behalf of Car
Parks, if an administration order is refused, the company will either be wound
up, pursuant to RAT’s petition, or a resolution to wind up will be passed at a
meeting of the shareholders. A liquidator would be unlikely to get the lease
back through an application for relief from forfeiture: first he would be
unlikely to be put in sufficient funds; second, the appointment of the
liquidator would involve significant delay; third, it would be more difficult
for a liquidator than for an administrator, from the point of view of both his
status vis-à-vis the landlord and his function under the 1986 Act, to
obtain relief from forfeiture.
In answer to this, Miss Giret raises a number of
points on behalf of RAT. First, she says that the whole of the argument and
justification for the administration order is based on the assumption that the
company will get relief from forfeiture. So far as that is concerned, she
points out that the company has not paid any rent since the grant of the lease,
and has been in breach of a number of covenants, on RAT’s case, as alleged in
the section 146 notice.
In my judgment, based on the evidence as it is at
the moment, the company has a very good chance of getting relief from forfeiture.
So far as forfeiture for non-payment of rent is concerned, it is well
established, indeed it is the whole basis for the security analogy, that if a
lease is forfeiture for arrears of rent, relief from forfeiture would be
accorded as a matter of course if the arrears are paid in full: see, for
instance, Gill v Lewis [1956] 2 QB 1. In the instant case, the
whole of the arrears of rent will be made available to RAT.
So far as the other breaches are concerned, there
are eight of them. Four are denied by the company, with supporting reasons.
Assuming that all eight are made out, four involve alleged failure to give
information to RAT. There is no suggestion anywhere in the fairly full
correspondence of any damage being suffered by RAT as a result. In those
circumstances, subject to any points that at the moment have not been raised or
even hinted at, relief from forfeiture would clearly be granted, provided that
the company provides the information it should have given: there is no
suggestion of any difficulty in this connection.
One of the alleged breaches relates to the
obtaining of the consent of RAT to the
determination of the construction contract with Marapaul. That consent is
expressly not to be unreasonably withheld. Assuming in favour of RAT that
consent was not obtained informally (and bearing in mind that the moving spirit
of RAT is a significant shareholder in the company, and, on the evidence,
frequently visits the premises, it may have been obtained informally), it seems
to me at the moment that the breach was a purely technical one. Had RAT’s
consent been sought, there is no basis that I can see upon which it could
reasonably have been withheld, given that Marapaul was in a voluntary
arrangement and had been an unsatisfactory contractor.
So far as two of the other breaches are concerned,
they relate to failure to get third parties, namely the contractors carrying
out the works and the surveyor supervising the works, to enter into appropriate
deeds with the landlord. It would, at any rate on the face of it, appear that
the two breaches will be made out, but the company is already seeking to put
the matter right. The deeds are in the process of being obtained. There is no
suggestion of any damage having been suffered by the landlord, and, in those
circumstances, I would have thought relief would not be refused on these two
grounds.
The final alleged breach concerns insurance. It is
unclear on the evidence that I have seen to what extent there has been a
breach. If there has been a breach, then, as Miss Giret realistically says, it
is, at least on the face of it, the most serious of the alleged breaches.
However, there is no suggestion of the landlord having suffered as a result.
The company is in the process of getting the requisite insurance, and, there
being no suggestion of any likely difficulty in this connection, I would not
expect relief to be refused on those grounds either.
Bearing in mind that there is a substantial sum of
money to be put into the administration; that none of these breaches appears to
have caused the landlord any significant damage; that, with possibly one
exception, they seem to be pretty minimal breaches on any view; and that they
can all be put right and are in the process, so far as they are admitted, of
being put right, it appears to me that it is very likely, bearing in mind the
value of this lease, that the company will obtain relief from forfeiture. If
these breaches are put right, it would be a wildly disproportionate penalty for
the tenant and a wildly disproportionate windfall for the landlord if the court
were to refuse the tenant relief from forfeiture, thereby giving the landlord
the benefit of the substantial works for which the tenant had paid, and taking
away the value of such building works from the tenant, even though the tenant
had paid them.
Second, Miss Giret says that the proposals raised
by the administrator may not be capable of being effected. First, she says,
Blenheim may not continue with the contract or agree to rotate the contract. It
seems to me that if Blenheim is owed money and is on site, and if the company
goes into liquidation, which it may have to do if Blenheim does not continue,
Blenheim will not get any money and will be unable to continue with the
contract. On the other hand, if the company goes into administration and
Blenheim continues with the contract, then Blenheim will be paid for part of
the work and will be paid for at least some further work. Blenheim is therefore
likely on the evidence to agree to continue with the contract for the works.
Then it is said that a liquidator would be in just
as good a position to get relief from forfeiture. I have already dealt with
that. First, it seems to me that it would take some time before a liquidator
was appointed and was ready to act. If he were appointed pursuant to RAT’s
petition, it would not happen until June; if it were pursuant to a vote of
shareholders, it would be very unlikely to be this month. Such delay would
prejudice the company, because it would render relief less likely to be
obtained. In any event, the liquidator, as I have said, would be in difficulty
in finding the money to pay the arrears of rent, which he would have to pay to
get relief, and, indeed, to pay the contractors.
Then it is said to be unfair on RAT that the company
should go into administration. It is pointed out that the company is under an
obligation to carry out the works under the lease by September this year. In my
judgment, the works are more likely to be completed by that date if the company
is put into administration, obtains relief from forfeiture and carries on the
contract with Blenheim, than if relief is refused. Of
novate with Blenheim.
On the evidence, it seems likely that the works
will be completed by September 1999, as the lease requires, if the
administration order is made and relief from forfeiture is obtained quickly.
Next, it is said that the lease could not be
assigned to a third party until September 1999 because assignment is precluded
until the works are carried out. I accept that, but it seems to me that the
point is dealt with by the argument of Mr Bompas, namely that the business
could be sold and there could be a binding contract to assign the lease, but
completion of that would have to await completion of the works.
Finally, Miss Giret points to open terms for
settlement put forward in a letter from RAT to the company, which, she says,
showed that a generous offer was made to the company, which it should accept
rather than be permitted to disadvantage RAT by seeking administration. To my
mind, requiring the company to agree terms within a short period of three or
four hours, which is what was involved in that proposal, was not realistic. In
any event, the terms as offered are not terms that one can criticise Car Parks
or the company or the shareholders who had time to consider it for rejecting.
There was no guarantee of the money mentioned in the letter being paid, and, once
this petition is abandoned as part of the proposed settlement, the company
would have no protection of any sort. Indeed, it seems to me that the terms of
the offer serve to justify the optimism expressed by Mr Sullivan in his
affidavit and by Mr Miller in his r
achieving a substantial sum to transfer, or to agree to transfer, the assets of
the company, including the lease. To my mind, RAT would probably be prepared to
offer a larger sum once it appears that there are two parties who are
interested, namely RAT and Mr Stamp. It seems to me that the company will be in
a stronger position, and therefore able to realise a better price for the
benefit of the creditors, if there is an administration order with the
protection that it involves and the opportunity for those two, and possibly
others, to be encouraged to bid against each other.
I am satisfied, on the test laid down by Hoffmann
J that there is a real prospect, indeed I would say a good prospect, that:
a more advantageous realisation of the company’s
assets than would be effected on [an administration than on] a winding up…
I also consider that there is a real prospect,
albeit I would not be as optimistic, of the section 8(3)(a) purpose
being achieved, and I would make the administration order on that basis. I
think logically that I should also make it on the basis of section 8(3)(b).
Relief from forfeiture
That brings me to the final point: relief from
forfeiture. Mr Bompas accepts that I cannot grant relief from forfeiture until
after I make the administration order, because the tenant, whether the company
or the administrator, is not before the court. However, he invites me to take a
realistic and practical view, particularly in light of the urgency of the
matter, and to grant relief from forfeiture now, having made the administration
order. I am tempted by the proposal, but I do not consider that it would be
right to accede to it. Although RAT may be at risk on costs if it seeks
unreasonably to deny relief from forfeiture, it is only just that it has a
proper opportunity to consider the application for relief. Although, as I have
indicated, I have a pretty clear view that relief will be granted, provided the
arrears of rent are paid over and any breaches are remedied, it would not be
right, in my view, and, specifically, would be unfair on the landlord, to grant
relief from forfeiture now. RAT must have an opportunity to consider and
respond to the application. There has not been a great deal of time for this.
On the other hand, RAT has had notice of the breaches for some time, having
identified them in a section 146 notice served more than two months ago, as I
have mentioned. Unlikely as it currently seems to me, RAT may think that there
is some good reason for refusing relief on one or more of those breaches.
Further, RAT may want to consider the precise terms upon which relief from
forfeiture is granted.
What I propose to order, bearing in mind the need
for urgency, but also bearing in mind the need for fairness to RAT, which has
validly forfeited the lease on good grounds, is as follows. I shall give RAT a
few days (and I have in mind significantly less than a week, unless persuaded
that is unduly oppressive) to consider its position with regard to the various
breaches and the application for relief from forfeiture. This would be with a
view, if the matter cannot then be agreed, to it coming back for me to
determine the question of relief from forfeiture. I expect a reasonable
attitude from RAT, but, equally, if not more, I expect a reasonable attitude
from the administrator. If RAT needs certain information about what is proposed
to be done, or what is being done, in relation to an alleged breach, then RAT
has every right to expect, and I would expect, the administrator to give full
information to RAT very promptly.
Petition granted.