Allyson Colby explains how a landlord secured permission to forfeit a restaurant lease while its tenant was in administration
Key points
- A landlord was entitled to forfeit a lease even though its tenant was in administration because, on the facts, forfeiture would not hinder the administration
- A landlord will be entitled to exercise contractual rights that could prevent a tenant in administration from assigning, or realising the value of, its lease
Administration provides breathing space for companies that are struggling to stay afloat. They are protected by a statutory moratorium, which prevents landlords from suing or distraining for rent, or from forfeiting their tenants’ leases without the administrator’s consent or permission from the court.
What then is the position if a landlord discovers that an administrator has allowed a buyer under a “pre-pack” deal into occupation of its tenant’s premises in breach of the terms of its lease? This was the situation in Re SSRL Realisations Ltd (in administration); Lazari Investments Ltd v Saville and others [2015] EWHC 2590 (Ch); [2015] PLSCS 268, where the tenant’s administrators allowed the buyer – a newly incorporated and associated company – to go into occupation of premises, which were used as a Strada restaurant, before obtaining a licence to assign from the landlord.
Legal wrangling
The landlord’s section 146 notice identified the facts that the tenant was in administration and that there was an illegal occupier trading from the property as grounds for forfeiting the lease. Meanwhile, the landlord refused the tenant’s applications for a licence to assign the lease to the new company, citing, among other reasons, the tenant’s inability to provide an authorised guarantee agreement and the newly formed company’s lack of covenant strength.
The administrators sat back and let the occupier conduct negotiations. The landlord terminated a licence to use a seating area outside the property that was personal to the tenant and an important adjunct to the restaurant, and finally asked the court for permission to forfeit the lease. This spurred the administrators into action. They arranged for the occupier to vacate the property, drew attention to offers for the lease made by prospective assignees, pointed to the fact that they were paying rent, and suggested that the landlord was trying to profit from the situation by recovering the property 16 years early in order to re-let at a higher rent.
The principles in play
In Re Atlantic Computer Systems plc [1992] Ch 505, the court explained that an administration for the benefit of unsecured creditors should not be conducted at the expense of those with proprietary rights, except in so far as this is unavoidable. If the exercise of a proprietary right is unlikely to impede an administration, a creditor should normally be given permission to repossess his land or goods.
If the administration would be impeded, the court must balance the interests of the landlord against those of the creditors by comparing the loss that the landlord will suffer, if permission to forfeit is refused, with the loss that creditors will suffer if permission is granted. The court may consider matters such as the company’s financial position, its ability to pay the rent, the history of the administration, the period for which the administration order has been in force and is expected to remain in force, the administrator’s proposals, the prospects of his objectives being achieved, and the conduct of the parties.
Impeding the administration
The higher the value of the lease, the more likely it was that the purpose of the administration would be impeded by granting the landlord permission to forfeit. However, the £1.377m premium that the administrators would have received for assigning the lease to the associated company was a product of the pre-pack arrangement – and was not a true reflection of its open-market value.
The judge decided that the open-market value of the lease was minimal. Therefore, it would not impede the administration to allow the landlord to forfeit the lease. The landlord was entitled to rely on rights that could be invoked without legal process, and could require an authorised guarantee agreement on any assignment of the lease and refuse to grant a new seating licence to potential assignees, even though this would prevent the administrators from assigning or unlocking the value of the lease.
Balancing exercise
It was therefore unnecessary to weigh the interests of the landlord and other creditors, but the judge indicated that the balance favoured the landlord. In Lazari GP Ltd v Jervis [2012] EWHC 1466 (Ch); [2013] BCC 294, the court recognised that a landlord had suffered loss because it had to delay enforcing its rights against a tenant, which had adversely affected negotiations for the grant of a new lease at a higher rent to a new tenant with a good covenant. This was also the case here.
The landlord had lost an opportunity to lease the property to a new tenant on terms that would have been financially advantageous and, while the moratorium continued, would be unable to have the property occupied by a tenant that was financially sound. Furthermore, it would be wrong to regard the fact that forfeiture would enable the landlord to re-let at a higher rent as a windfall; this was simply the result of the terms agreed by the parties.
On the other hand, the uncertainty caused by the administration had not harmed the landlord, and the breaches of the covenants in the lease were not fatal. However, the fact that the administrators had been appointed nine months previously did count against them. Administration is intended to be a temporary regime and the administrators had sat back for too long. Furthermore, even if it were possible to obtain a modest premium for the lease in the open market, the amount would be so small when compared with the estimated shortfall of £11m that its lack of recoverability would be inconsequential.
Allyson Colby is a property law consultant
