Assign lease held by company in administration – Applicant landlord refusing permission on grounds of proposed assignee’s lack of financial standing – Applicant seeking permission of court to seek forfeiture of lease for breach of covenant – Application of para 43 of Schedule B1 to the Insolvency Act 1986 – Whether forfeiture impeding purpose of administration – Whether administrators capable of realising substantial premium for lease in absence of forfeiture – Application allowed
The fourth respondent and a sister company together operated the Strada restaurant chain. In 2014, the fourth respondent went into administration and the first to third respondents were appointed as its administrators. At the date of the administration, an asset purchase agreement was already in place under which certain assets of the fourth respondent were to be sold to a newly formed company which had been incorporated as a subsidiary of the fourth respondent and its sister company. The assets to be sold included a lease of restaurant premises in the Brunswick Centre, London WC1, which the fourth respondent held on a for a term of 25 years from December 2006 under which the applicant, as the owner of the Brunswick Centre, was the landlord. The respondents sought the consent of the applicant for permission to assign the lease to the subsidiary, which had agreed to pay a premium of nearly £1.377m for the lease. In the meantime, the fourth respondent granted a licence to occupy the premises to the subsidiary.
The applicant was unwilling to grant consent to the proposed assignment since the subsidiary had no trading history and no independent financial strength. After serving a notice under section 146 of the Law of Property Act 1925, it applied to the court for permission, under para 43 of Schedule B1 to the Insolvency Act 1986, to forfeit the lease. The grounds for forfeiture were that the fourth respondent had gone into administration and that it had it was in breach of the lease by parting with or sharing possession of the premises with a third party. In mid-2015, the applicant terminated a seating licence, personal to the fourth respondent, which had enabled it to use a seating area outside the premises.
Opposing the application, the respondents contended that forfeiture of the lease would impede the purposes of the administration and that no prejudice would be caused to the applicant by refusing permission to forfeit. They argued that they should not be prevented from realising the value of the lease for the benefit of the administration by selling it, if not to the subsidiary, then to another group company or to a third party purchaser which had expressed an interest in it.
Held: The application was allowed.
(1) The grant of permission to forfeit the lease would not impede the purposes of the administration. The lease had little value in the hands of the administrators. While the administrators would have realised nearly £1.377m on a successful assignment of the lease to the subsidiary, that outcome was a product of the structure of the asset purchase agreement and was not a true reflection of the open market value of the lease. The applicant’s withholding of consent to that assignment was entirely reasonable where the subsidiary was not of sufficient financial standing and no authorised guarantee agreement (AGA) had been offered in respect of it. Similar problems arose with the proposals for a sale of the lease to another group company. Outside of the asset purchase agreement, there was no real prospect of realising a substantial sum for the lease. The offer received from the third party purchaser, although made by an acceptable assignee at arm’s length and with full knowledge of the terms of the lease, had to be discounted because the purchaser was unwilling to purchase without the benefit of the seating licence. There was no longer any seating licence because the applicant had terminated it. The applicant had been entitled to do so and it could not be compelled to grant a new seating licence to the third party purchaser. The absence of a seating licence was likely to prove a fatal obstacle to finding any suitable assignee and enabling the administrators to achieving a premium by assigning the lease.
Accordingly, while the leasehold interest had some potential premium value, the administrators could not unlock that value due to the applicant’s lawful exercise of its rights. Those rights were a product of the bundle of rights and obligations which were agreed between the landlord and the tenant long before the administrators became involved. They included the right to terminate the seating licence and to decline to grant a new seating licence to a prospective assignee, and the right to require the provision of an AGA. The purpose of the material provisions of the 1986 Act was to provide a moratorium to enable the administrators to retain or realise assets for the benefit of creditors. That involved postponing the enforcement of substantive rights. However, it did not preclude a lessor from relying on rights which it could invoke without legal process, even if it would further the purpose of the administration for the lessor to agree or to be prevailed upon not to rely on them.
(2) Further, no purpose of the administration would be served by limiting the applicant to seeking forfeiture by legal proceedings as opposed to forfeiting by peaceable re-entry. Regardless of which course was taken, it would be open to the fourth respondent to apply for relief from forfeiture and its prospects of success would not be affected either way. The only difference was that, if the applicant forfeiter by legal proceedings, the fourth respondent would be able to counterclaim for relief from forfeiture, whereas if the applicant forfeited by way of peaceable re-entry, the fourth respondent would need to commence separate proceedings.
(3) Per curiam: Even if , contrary to the above, the purpose of the administration would be impeded by granting permission to the applicant to exercise its rights of forfeiture, the balancing exercise which the court then had to perform would still come down in favour of granting permission to forfeit. Factors in favour of granting permission included the grounds for doubting that the administrators would be able to unlock whatever value the leasehold interest might have, coupled with the modest effect on the administration if they were denied the opportunity to realise that value. Meanwhile, for the duration of the subsidiary’s occupation of the premises, the applicant had not only been denied the ability to exercise its proprietary rights but had also lost the opportunity to lease the property to a new tenant on terms which would be financially advantageous to the applicant and which would involve the premises being occupied and used in a manner which the applicant considered beneficial to its interests as owner of the Brunswick Centre. Those matters comprised significant loss to the applicant which would be continued or repeated in the event that permission to forfeit the lease were refused: Re Atlantic Computer Systems plc [1992] Ch 505, Sunberry Properties Ltd v Innovate Logistics Ltd (in administration) [2008] EWCA Civ 1321; [2009] BCC 164; [2008] PLSCS 314 and Lazari GP Ltd v Jervis [2012] EWHC 1466 (Ch); [2013] BCC 294 applied.
Blair Leahy (instructed by Charles Russel Speechlys LLP) appeared for the applicant; Katharine Holland QC (instructed by Taylor Wessing LLP) appeared for the respondent.
Sally Dobson, barrister
