Insolvency — Landlord and tenant — Liquidator disclaiming headlease — Subtenant declining to seek vesting order — Whether court entitled to order that headlease should vest with freeholder — Whether subleases continuing
By a lease dated May 22 1985 ITM held a
headlease of business premises from the plaintiff freeholder for a term of 25
years. The first defendant, P, held underleases of three floors of the
premises. In January 1992 P allowed S into occupation of the three floors, and
S paid rent first to ITM, and then, pursuant to a notice under the Law of
Distress Amendment Act 1908, to the freeholder. ITM refused consent to the
assignment of the underleases to A, and no assignment took place. In September
1995 ITM was ordered to be compulsorily wound up, and in March 1996 the
liquidator disclaimed the headlease. Neither P or S sought a vesting order in
relation to the headlease, and have made plain that if put to an election by
the freeholder, they would elect to be excluded from all interest in the
property. Following an application by the freeholder, in October 1996 the
registrar ordered that the headlease be vested with the freeholder with the
benefit of the existing underleases. P and S appealed against that decision.
S had declined to accept a vesting order under section 181 of the Insolvency
Act 1986, they were excluded by section 182(4) from all interest in the
property. In those circumstances the freeholder was not entitled to have the headlease
vested in it within the meaning of section 181(3)(a) of the Insolvency
Act 1986. The court had no jurisdiction to make the order, and therefore the
subleases were at an end.
The following cases are referred to in
this report.
AE Realisations (1985) Ltd, In re [1988] 1 WLR 200; [1987] 3
All ER 83
Cock, Re, ex parte Shilson (1887) 20 QBD
343
Finley, In re, ex parte Clothworkers’ Co
(1888) 21 QBD 475
Hindcastle Ltd v Barbara Attenborough
Associates Ltd [1997] AC 70; [1996] 2 WLR 262; [1996] 1 EGLR 94; [1996] 15
EG 103
This was an appeal by the first and
second defendants, Pickard UK Ltd and Solution 6 (UK) Ltd, from a decision of
Mr Registrar Buckley, who had ordered that a disclaimed headlease be vested in
the respondent plaintiff, Sterling Estates.
Jonathan Gaunt QC (instructed by Dibb
Lupton Alsop) appeared for the appellants; Linden Ife (instructed by Berwin
Leighton) represented the respondent.
Giving judgment, MR MICHAEL CRYSTAL QC
said: Sterling Estates is the freehold owner of Meridien House, 100 Hanger
Lane, London W5. Meridien House was let by Sterling’s predecessor in title,
Liverpool Victoria Trustees Ltd, to ITM Corporation Ltd (ITM) by a lease dated
May 22 1985 for a term of 25 years from May 22 1985.
Paxus Professional Systems Ltd, now
called Pickard UK Ltd (Paxus) is the subtenant of parts of Meridien House,
having been granted underleases in respect of the ground floor, the first floor
and the third floor.
In January 1992 Paxus allowed Solution 6
(UK) Ltd (Solution 6) into occupation of the ground, first and third floors.
Solution 6 paid the rent to ITM and, pursuant to a notice under the Law of
Distress Amendment Act 1908, to the freeholder. ITM refused to consent to the
assignment of the underleases to Solution 6, and no assignment has ever taken
place. It is not necessary for present purposes to determine whether Solution 6
is a periodic subundertenant of Paxus, a periodic subtenant of ITM, or a mere
licensee.
ITM was ordered to be compulsorily wound
up on the September 20 1995, and a liquidator was appointed. On March 8 1996
the liquidator gave notice of disclaimer, so far as material, in the following
terms:
I, Frederick Charles Satow, ACA, the
liquidator of the above-named company, disclaim all of my interest in property
situate at Meridien House, Hanger Lane, London, W5, comprised in a lease dated
22 May 1985 between Liverpool Victoria Trustees Ltd (1) and ITM Corporation Ltd
(2) for a term of 25 years from May 22 1985 …
Notice of this disclaimer was given, so
far as is material, to Sterling Estates, Paxus and Solution 6.
On May 7 1996 Sterling Estates applied in
the winding up of ITM for an order vesting ITM’s disclaimed interest in itself.
On October 30 1996 Mr Registrar Buckley made an order that:
The unexpired term of a lease dated May
22 1985 made between Liverpool Victoria Trustees Ltd and ITM Corporation Ltd of
Meridien House, 100 Hanger Lane, London, W5 be vested in Sterling Estates (the
applicant) subject to, and with the benefit of, the existing sub-leases of the
various parts of the property.
Paxus and Solution 6 appeal against that
order. The question raised by this appeal is whether the court has jurisdiction
to make the order made by Mr Registrar Buckley.
Disclaimer: aspects of the statutory
framework
Section 178 of the Insolvency Act 1986
gives a liquidator the power to disclaim onerous property: see section 178(2).
A disclaimer under section 178 operates so as to determine as from the date of
the disclaimer the rights, interests and liabilities of the company in or in
respect of the property disclaimed: section 178(4)(a). The disclaimer
does not, except so far as is necessary for the purpose of releasing the
company from any liability, affect the rights or liabilities of any other
person: section 178(4)(b).
A disclaimer under section 178 of any
property of a leasehold nature does not take effect unless a copy of the
disclaimer has been served, so far as the liquidator is aware of their
addresses, on every person claiming under the company as underlessee or
mortgagee, and either
days of the date on which the last notice has been served, or, where an
application is made, the court directs that the disclaimer should take effect:
section 179.
Section 181 contains the general powers
of the court where the liquidator has disclaimed property under section 178.
Section 181(2)(a) provides:
An application under this section may be
made to the court by —
(a) any person who claims an
interest in the disclaimed property.
Section 181(3)(a) provides:
Subject as follows, the court may on the
application make an order, on such terms as it thinks fit, for the vesting of
the disclaimed property in, or for its delivery to —
(a) a person entitled to it …
Section 181 applies to all property of a
company which is capable of disclaimer, ie onerous property. Section 178(3)
defines onerous property as:
(a) any unprofitable contract, and
(b) any other property of the
company which is unsaleable or not readily saleable or is such that it may give
rise to a liability to pay money or perform any other onerous act.
Section 182 imposes restrictions on the
power of the court to vest property of a leasehold nature in any person
claiming under the company as underlessee or mortgagee. The court can make such
a vesting order only on terms which subject the underlessee or mortgagee to the
same liabilities and obligations as the company was subject to under the lease
at the commencement of the winding up, or subject to the same liabilities and
obligations as the underlessee or mortgagee would be subject to if the lease
had been assigned to him at the commencement of the winding up: section 182(1).
In a case where section 182(1) applies,
and no person claiming under the company as underlessee or mortgagee is willing
to accept an order on the terms required by the statute, the court may vest the
company’s estate or interest in the property in any person who is liable,
whether personally or in a representative capacity, and whether alone or
jointly with the company, to perform the lessee’s covenants in the lease:
section 182(3). Where section 182(1) applies, and a person claiming under the
company as underlessee or mortgagee declines to accept an order under section
181, that person is excluded from all interest in the property: section 182(4).
Sections 178(4), 181 and 182 of the
Insolvency Act 1986 substantially re-enact section 55 subsections (2) and (6)
of the Bankruptcy Act 1883. The relevant provisions of the 1883 Act were
re-enacted in section 54 of the Bankruptcy Act 1914. The provisions of that Act
were the model for section 267 of the Companies Act 1929. The 1929 Act
introduced provisions for the disclaimer of onerous property into the winding
up of a company for the first time. A description of the relevant legislation
between 1883 and 1996 is to be found in the judgment of Mr Justice Vinelott in In
re AE Realisations (1985) Ltd [1988] 1 WLR 200 at p204 E to H. Section 55,
subsections (2) and (6) of the Bankruptcy Act 1883 are set out in that judgment
at pp207 G to 208 E.
Disclaimer where other persons have an
interest in the property
In Hindcastle Ltd v Barbara
Attenborough Associates Ltd [1996] 2 WLR 262*, the House of Lords
considered the consequences of disclaimer on insolvency. Lord Nicholls of
Birkenhead, who gave the leading speech, identified three principal categories
of landlord and tenant situations where disclaimer on insolvency has an impact.
The three categories are: (1) a case where only a landlord and tenant are
involved; (2) a case where others have liabilities in respect of the lease; and
(3) a case where other persons have an interest in the property. The actual
case before the House of Lords fell into category (2). The case before me falls
into category (3). In relation to a case in this category, Lord Nicholls at
p273 F to H observed:
*Editor’s note: Also reported at [1996] 1
EGLR 94
In both instances considered so far no
person had acquired a proprietary interest under the lease before disclaimer.
The third typical case is where a third party has acquired such an interest.
The prime example is a subtenant. I can deal with this very shortly. In order
to free the tenant from liability, it is necessary to extinguish the landlord’s
rights against the tenant and also the subtenant’s rights against the tenant.
The tenant’s interest in the property is determined, but not so as to affect
the interest of the subtenant. Determination of the subtenant’s interest in the
property is not necessary to free the tenant from liability. Hence the
subtenant’s interest continues. No deeming is necessary to produce this result.
Here the deeming relates to the terms on which the subtenant’s proprietary interest
continues. His interest continues unaffected by the determination of the
tenant’s interest. Accordingly the subtenant holds his estate on the same
terms, and subject to the same rights and obligations, as would be
applicable if the tenant’s interest had continued. If he pays the rent
and performs the tenant covenants in the disclaimed lease, the landlord cannot
eject him. If he does not, the landlord can distrain upon his goods for the
rent reserved by the disclaimed lease or bring forfeiture proceedings. In
practice, matters are likely to be brought to a head by one of the parties
making an application for a vesting order.
Accordingly, the subtenant’s proprietary
interest in the property continues unaffected by the determination of the
tenant’s interest on its disclaimer by the liquidator of the tenant. The
subtenant remains entitled to possession of the property under the underlease,
subject to payment of the rent.
Disclaimer: how the legislation is
intended to work
Section 55, subsections (2) and (6) of
the Bankruptcy Act, 1883 were the subject of authoritative consideration by the
courts in the late 1880s. In Re Cock, ex parte Shilson (1887) 20 QBD
343, a lessee mortgaged property by subdemise. He went bankrupt and his trustee
in bankruptcy disclaimed the lease. The lessor applied for an order that the
mortgagee should be excluded from all interest in and security upon the
property, unless within seven days he elected to accept an order vesting in him
the disclaimed property, subject to the same liabilities and obligations as the
bankrupt was subject to under the lease. The Divisional Court in Bankruptcy
(Cave and AL Smith JJ) held that such an order could be made upon the
application of the lessor.
Mr Justice Cave, delivering the judgment
of the court, at pp348 to 349, said:
Let us see how the case will work out in
practice. A grants a lease for ninety-nine years at [£100] a year to B, who
assigns to C, who in consideration of an advance of [£2,000] demises to D. for the
residue of the term, except three days, at a peppercorn. C becomes bankrupt,
and his trustee wishing to disclaim brings A, B, and D before the Court. A
cannot apply for a vesting order because he is not entitled to the property,
nor can B so long as D is willing to take a vesting order. B therefore applies
that D may be put to his election, and if he declines to take a vesting order
that he may be excluded, and a vesting order made in favour of him, B. The same
thing occurs where C is the lessee and B is only a surety for him. Where there
is no person liable, either jointly with the bankrupt or alone, to perform the
lessee’s covenants we are of opinion that … the landlord may apply that the
sub-lessee may be put to his election. If he elects to take a vesting order he
gets one. If he declines the landlord may ask for an order excluding the
sub-lessee from all interest in and security upon the property, and vesting the
property in him, the landlord, discharged from the sub-lease, because, by
virtue of the disclaimer and of the exclusion of the sub-lessee he has become
the party entitled. This course appears to us to be warranted by the language
of the Act, and to carry out its provisions. Until the sub-lessee has declined
to take a vesting order the Court has no power to make a vesting order either
in favour of the original lessee or of the surety for the bankrupt, if there is
one, and, consequently, if the power could only be exercised upon an
application by a sub-lessee it would remain a dead letter, for the sub-lessee
never would have any interest in making such an application, and the person
liable jointly with the bankrupt, or alone, could not get a vesting order until
the sub-lessee had declined. Where all the parties are before the Court upon an
application for leave to disclaim, the vesting order may at once be offered to
the sub-lessee, and on his refusal may be granted to the surety or
original lessee, or if there is no person liable alone or jointly with the
bankrupt, an order for a vesting order and for delivery of possession, or for a
vesting order only, as the circumstances may require, may be made in favour of
the lessor. Where no leave to disclaim is required, and consequently the
parties interested in the property disclaimed or liable to perform the
covenants of the lease are not brought before the Court by the trustee, we are
of opinion that the person liable to perform the covenants, or, in the absence
of such person, the lessor, may bring the sub-lessee before the Court, and ask
for an order for his exclusion and for a vesting order, or for delivery of the
property, if the sub-lessee refuses himself to take a vesting order.
The essence of the Divisional Court’s
view was that the court had no power under section 55 of the Bankruptcy Act
1883 to make a vesting order in favour of a landlord until the interests of all
other relevant parties who had or could obtain an interest in the property had
been cleared away through use of the statutory machinery.
Re Cock, ex parte Shilson was approved and followed by
the Court of Appeal in In re Finley, ex parte Clothworkers’ Co (1888) 21
QBD 475, where a similar application was under consideration. In this case the
mortgagee had in fact taken possession of the mortgaged premises and let them
to a tenant after the adjudication in bankruptcy. The judgment of the court
(Lord Esher MR, and Lindley and Bowen LJJ), was delivered by Lindley LJ. At
pp485–487 Lindley LJ observed:
Next we must consider the more
complicated case of the original lessee becoming bankrupt, and we must consider
it, first, as between him and his lessor. As between them the consequences will
be the same if there were no sub-lease. As between the lessee and the
sub-lessee the consequences will apparently be these. The lessee’s rights and
interests and liabilities are determined under sub-s 2, and the extinction of
his rights involves the extinction of the liability of the sub-lessee under his
covenants.
We must next consider the case as between
the original lessor and the sub-lessee. Now their rights and liabilities are
preserved by sub-s 2, and, subject to the effect of a vesting order, whatever
that may be, the case will stand in this way — the sub-lessee, although freed
from his covenants to his own immediate lessor, must perform the covenants of
the original lease or he will be liable to be distrained upon and to be ejected
by the original lessor. That is obviously his position, and that was the
position in which a lessee found himself, on the disclaimer of the lease by the
trustee in the bankruptcy of his assignee, in Hill v East and West
India Dock Co [9 App Cas 448] under the Bankruptcy Act, 1869. That is by no
means an enviable position, and it is a strange position in which to leave him.
But the present Bankruptcy Act goes further. It does not stop with sub-s 2, but
sub-s 6 has also to be considered. The sub-lessee can evidently apply under
sub-s 6 for an order vesting the lease in him; there is no controversy about
that. But the question is, whether the lessor can apply for an order vesting
the lease in the sub-lessee? It appears to us, for the reasons which I have
already stated, having regard, that is, to the meaning of the word ‘property’
and of the words ‘person claiming any interest in the disclaimed property’,
that the lessor can apply for such an order. But, whether the application is
made by the sub-lessee or by the original lessor, in either case the vesting
order can only be made in favour of the sub-lessee, subject to the covenants
and conditions of the original lease, and, if the sub-lessee will not take the
property on those terms, which, of course, he need not do, then these
consequences appear to follow: First, the sub-lessee will be excluded from all
interest in the disclaimed property. Whether the latter part of the proviso in
clause 6 will apply will depend upon whether there is any such person as is
there referred to. There may or may not be. If no vesting order is made, the
lease will be determined under sub-s 2, the sub-lease will be determined under
sub-s 6, and the lessor will take the property freed from both lease and
sub-lease. This appears to us to be the logical consequence of the Act, and it
is impossible not to see that it is a very startling result. It will very
seriously affect the old practice of taking securities on leasehold property by
way of sub-demise, the whole object of which was to prevent the mortgagee from
becoming liable to the rent and to the covenants and obligations of the
original lease. If the decision of the Divisional Court in Ex parte Shilson
[20 QBD 343] is right, as we think it is, this anomaly will be introduced into
the practice of conveyancing in the event of the bankruptcy of a mortgagee of
leasehold property by sub-demise.
Given the provenance of the Insolvency
Act 1986, the guidance provided by the Victorian cases is equally applicable to
the current disclaimer legislation: see per Vinelott J, In re AE
Realisations supra, at p204H. In Hindcastle Lord Nicholls described Re
Finley as one of the leading cases: see supra at p275. He also stated
that Lindley LJ’s analysis of the effect of the Bankruptcy Act 1883 was similar
to his own in relation to categories 1 and 3 of the principal types of landlord
and tenant situations on which disclaimer on insolvency has an impact: see supra
at p275G to H.
Current application
Sterling Estates has not applied for an
order that the disclaimed property be vested in Paxus or Solution 6, subject to
the same liabilities and obligations as ITM was subject to under the headlease,
or that they be excluded from all interest in the property. It has not done so
because Paxus and Solution 6 have made it plain that if they are put to their
election they will elect to be excluded from all interest in the property. The
rent under the headlease is £18 per sq ft. A current rent would be of the order
of £7 to £8 per sq ft, and, accordingly, electing to become subject to the
headlease would make no economic sense. Instead Sterling Estates contends that
the court can make an order vesting the disclaimed lease in it, Sterling Estates,
as landlord, with the consequence that, so it is said, Sterling Estates becomes
entitled to the benefit of the existing subleases; in other words, the argument
is that a landlord can obtain a vesting order from the court without clearing
off the interests of those categories of interested or potentially interested
persons identified in section 182.
Linden Ife, for Sterling Estates, submits
that the court has jurisdiction to make such an order under section 181. I do
not think this can be correct. To come within section 181 Sterling Estates has
to show:(1) that it is a person claiming an interest in the disclaimed property
(see section 181(2)(a)); and (2) that it is a person entitled to the
property (see section 181(3)(a)). In those events, the court would have
power to vest the disclaimed property in Sterling Estates.
As to (1), the Victorian cases referred
to above show that a landlord is a person claiming an interest in the
disclaimed property. As to (2), however, the crucial words are:
the court may … make an order … for the
vesting of the disclaimed property in –, or for its delivery to:
(a) a person entitled to it …
The ‘it’ must refer to the property in
question.
Lord Nicholls’ analysis of the
consequences of disclaimer on insolvency on a subtenant makes it plain that the
subtenant does not, by virtue of the disclaimer of the interest of the tenant
in the property, lose his, the subtenant’s, interest in the property itself. He
remains entitled to possession of the property; the landlord is not therefore
entitled to it. He can only become entitled to possession of the property as
against the subtenant by invoking the mechanism contained in section 182. In
cases where the economic implications are the same as in the present case,
where a landlord puts a subtenant to his election and the subtenant elects not
to accept an order under section 181, he is excluded from all further interest
in the property. His sublease then goes and with it the subtenant’s right to
continue in possession of the property.
Conclusions
For over 110 years the legislation
dealing with disclaimer on insolvency has been in essentially the same form.
There is no reported decision in which a landlord has attempted to do what
Sterling Estates seek to do in this case. So far as the researches go, none of
the standard textbooks, nor precedents, suggest that the court has jurisdiction
to make an order of the type sought by Sterling Estates.
Recession is a part of the economic
cycle. There have been a number of recessions over the last 110 years. It does
not appear to have occurred to those advising landlords in former recessionary
times that they could obtain from the court an order of the type made by the
registrar in this case.
These matters are, of course, only
indicators as to the likely presence or absence of the asserted jurisdiction.
For the reasons which I have endeavoured
to give above, I am satisfied that the court has no jurisdiction to make the
order sought by Sterling Estates in this case. The order made by Mr Registrar
Buckley, so far as concerns Paxus and Solution 6, must therefore be discharged.