Can a Landlord be Forced to Accept a Surrender of a Lease?
In part 2 of a series of blogs we consider whether a landlord can be forced to accept a surrender of a lease and the consequences of that.
This point was recently considered in the context of a scheme of arrangements where the Court concluded that a landlord cannot be forced to accept a surrender of a lease because this affects the landlord’s proprietary rights and therefore was outside of the scope of the arrangement.
Earlier this year, we posted a blog outlining the conclusions from the challenge brought by landlords to the Debenhams CVA. In short, the Court determined that a CVA cannot vary a landlord’s right to forfeit, this being a proprietary right. A landlord therefore retains and can exercise forfeiture rights under the lease (assuming grounds to forfeit exist) if its tenant enters a CVA. For further detail and to read that post in full click here.
More recently, the case of Instant Cash Loans considered whether a scheme of arrangements could require landlords to accept a surrender of their lease.
Outside of the context of insolvency a lease can only be surrendered consensually, in other words a landlord cannot be forced or obliged to agree a surrender and there may be good reason why a landlord chooses not to accept a surrender. For example, if a landlord takes back possession of a property, responsibility for paying business rates reverts back to the landlord. There are also environmental risks and occupiers liabilities which may fall on the landlord once possession of the property is returned.
In the Instant Cash Loans case where the terms would effectively require landlords to accept a surrender whether they agreed or not, the Court concluded that a scheme of arrangements cannot oblige landlords to accept a surrender when that might have consequences which a landlord might otherwise not be willing to accept – such as responsibility for payment of business rates, environmental liabilities etc.
The court concluded that unilaterally terminating a lease substantively changes the landlord’s proprietary interest in the property. This is outside of the scope of a scheme of arrangements which can only deal with the rights between the parties as debtor and creditor, not rights which exist between the parties as landlord and tenant. As such, a scheme of arrangements cannot require a landlord to accept a surrender and re-take possession.
The decision recognises that there is no material difference between a scheme of arrangements and a CVA. Accordingly, we would expect the conclusions in Instant Cash Loans to apply equally to CVAs, such that a CVA proposed by a tenant cannot oblige a landlord to accept a surrender of the lease.
Part 1 of this series of blogs considered the question: Does a company voluntary arrangement permanently vary the terms of a lease? To read that in full click here.
Part three to be published later this week will consider: What are the consequences of taking money from a rent deposit if the tenant company is in administration?