The pace of an asset sale agreement often outstrips legal formalities where leasehold properties are changing hands. So contracts for sale of leasehold premises, which can usually be assigned only with landlord’s consent, commonly contain provisions enabling the purchasing company to take immediate occupation, under a licence, in return for an indemnity against rent and any other liabilities under the lease. The decision in Bizspace (NE) Ltd v Baird Corporatewear Ltd [2007] PLSCS 24 provides an insight into some potential problems, and the possible solutions that can be applied, in cases where the lease is not subsequently assigned to the purchaser. The tenant’s lease terminated four years after the asset sale agreement; the company had not traded since the sale and had no significant assets. However, the landlord had no direct contractual relationship with the occupier – and a claim for dilapidations costed at £335,000. The tenant’s parent company proposed a clever solution. The tenant and its parent company assigned to the landlord the benefit of the indemnities in the asset sale agreement, thereby providing the landlord with a direct cause of action against the occupier. Did the solution work? The High Court decided that it did. The occupier acknowledged that the landlord could use the deed of assignment to pursue an action for damages against it, but argued that the assignment had negated the loss. It said that it had agreed to indemnify the tenant and its parent company against any claims that the landlord brought against them in respect of the lease. However, the landlord now had no claim against them, which reduced their liability to nil. This meant that there was nothing for them to recover from the occupier – and the law prohibits an assignee of a contractual right from recovering more from the debtor than the assignor could have done had the debt not been assigned. However, the judge ruled that the legal principle existed to prevent debtors from being prejudiced by an assignment, and that it should not be allowed to enhance the position of a debtor by allowing it to escape liability, using a “legal conjuring trick worthy of Houdini”. The law would not allow the occupier to be placed in a worse position because the benefit of the indemnity covenant had been assigned to the landlord, but neither would it allow the landlord’s damages to disappear into a “black hole”: Technotrade Ltd v Larkstore Ltd [2006] EWCA Civ 1079; [2006] 42 EG 246, applied. Litigators will be pleased to hear that the court also rejected arguments that the tenant and its parent company had reached a “compromise” with the landlord, in breach of the conditions on which the indemnity was given. The tenant and its parent company had not surrendered to, conceded or settled the landlord’s claim. They had not admitted liability to, or discussed quantum with, the landlord, or cut the ground from under the occupier’s feet in any way. Allyson Colby is a property law consultant
The pace of an asset sale agreement often outstrips legal formalities where leasehold properties are changing hands. So contracts for sale of leasehold premises, which can usually be assigned only with landlord’s consent, commonly contain provisions enabling the purchasing company to take immediate occupation, under a licence, in return for an indemnity against rent and any other liabilities under the lease. The decision in Bizspace (NE) Ltd v Baird Corporatewear Ltd [2007] PLSCS 24 provides an insight into some potential problems, and the possible solutions that can be applied, in cases where the lease is not subsequently assigned to the purchaser. The tenant’s lease terminated four years after the asset sale agreement; the company had not traded since the sale and had no significant assets. However, the landlord had no direct contractual relationship with the occupier – and a claim for dilapidations costed at £335,000. The tenant’s parent company proposed a clever solution. The tenant and its parent company assigned to the landlord the benefit of the indemnities in the asset sale agreement, thereby providing the landlord with a direct cause of action against the occupier. Did the solution work? The High Court decided that it did. The occupier acknowledged that the landlord could use the deed of assignment to pursue an action for damages against it, but argued that the assignment had negated the loss. It said that it had agreed to indemnify the tenant and its parent company against any claims that the landlord brought against them in respect of the lease. However, the landlord now had no claim against them, which reduced their liability to nil. This meant that there was nothing for them to recover from the occupier – and the law prohibits an assignee of a contractual right from recovering more from the debtor than the assignor could have done had the debt not been assigned. However, the judge ruled that the legal principle existed to prevent debtors from being prejudiced by an assignment, and that it should not be allowed to enhance the position of a debtor by allowing it to escape liability, using a “legal conjuring trick worthy of Houdini”. The law would not allow the occupier to be placed in a worse position because the benefit of the indemnity covenant had been assigned to the landlord, but neither would it allow the landlord’s damages to disappear into a “black hole”: Technotrade Ltd v Larkstore Ltd [2006] EWCA Civ 1079; [2006] 42 EG 246, applied. Litigators will be pleased to hear that the court also rejected arguments that the tenant and its parent company had reached a “compromise” with the landlord, in breach of the conditions on which the indemnity was given. The tenant and its parent company had not surrendered to, conceded or settled the landlord’s claim. They had not admitted liability to, or discussed quantum with, the landlord, or cut the ground from under the occupier’s feet in any way. Allyson Colby is a property law consultant
