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Relief from forfeiture – in the balance

The demise of high street retail and the insolvency of household names, including Woolworths, BHS, and more recently Debenhams and Monsoon has been a real headache for property owners.

The moratorium created by administration ties the hands of landlords, preventing them from forfeiting leases without first having obtained the consent of the administrator or the leave of the court.

When a landlord (or indeed any creditor) comes to court asking the court to exercise its discretion and dis-apply the moratorium, the court has to undertake an exercise of balancing the impact upon both parties weighing up the rights and property interests of the landlord on the one hand and the interests of creditors on the other.

If a tenant enters voluntary liquidation, a landlord can forfeit the lease without permission of the Court.  But if the lease is a valuable asset an insolvency practitioner can apply to Court for relief from forfeiture to enable that asset to be sold.

A similar balancing exercise is required to ascertain whether the property should be returned to the landlord and the lease forfeit or whether the lease should remain in existence to enable the tenant to remain in occupation or, as in the case of SHB Realisations Limited v Cribbs Mall Nominee (1) Ltd [2003] WLUK 588 to enable the lease to be assigned and monies paid into the insolvent estate.

In SHB, HHJ Ralton sitting in the Bristol County Court granted conditional relief from forfeiture to the insolvent tenant of a retail unit.  It was unusual order because the tenant was undeniably in breach of a covenant in its 125 year lease to keep the premises open.   In such a scenario the landlord might reasonable expect the Court to allow the lease to be forfeit. Especially, as in this case, the tenant acknowledged that it was in breach of covenant and that the breach would not be remedied.

Whilst the Judge granted relief, it was subject to a condition that relief only be granted for 3 months to allow the tenant to complete an assignment of the lease and if not completed during that period the lease would be forfeit.

The Facts

In 1998, BHS took a 125-year lease of a sub-anchor unit at the Mall at Cribbs Causeway in Bristol for a peppercorn rent, but with a premium of £7.05m plus VAT. The lease included a “keep open” covenant, which required BHS to open its shop 7 days a week during specified opening hours.

Following the administration of BHS, the store closed permanently on 28 August 2016 rendering BHS (now SHB Realisations) in breach of its keep open covenant. As a result, the landlord served notice of forfeiture, on the basis that SHB could not remedy the breach or comply with the covenant going forward.

SHB and its mortgagee (GB) Europe Management Service sought relief from forfeiture for a period of 6 months, to allow further time to assign the lease. They argued that their attempts to market the lease had been hindered by the ongoing litigation and planning applications. The landlord counterclaimed requesting immediate possession, stating that the 36 months which had already elapsed was ample time in which to secure an assignment of the lease.

The Balancing Exercise

In order to exercise his discretion on whether to grant relief from forfeiture, and if so, for how long the Judge had regard to the following factors:

  1. SHB was and is in deliberate but not wilful breach of covenant not caused by third parties;
  2. SHB had an asset which was once of considerable value and it should not be deprived of the opportunity to reduce its debts;
  3. GB was a secured creditor and should not be deprived of its security;
  4. There was still a real market for the lease and a real rather than fanciful prospect of finding an assignee;
  5. The lease has a value of over £1,000,000;
  6. The breach of covenant was incurable and will continue until an assignee is found who opens their store for business;
  7. Therefore the landlord suffers ongoing damage and their other tenants some damage by being in a mall where the fourth largest store had been and continued to be boarded up;
  8. If the landlord remained unable to recover possession, they would be unable to devise and implement strategies for the mall incorporating the specific unit for their benefit and the benefit of all retailers in the mall;
  9. The landlord’s hands were not clean – they had falsely referred to a prospective purchaser.

The Decision

Balancing the positon of both parties, it was right that there should be conditional relief from forfeiture; however the main condition was that SHB must complete an assignment of the lease by 17.00 on 28 June 2019 (just under 3 months’ time).

The Judge also noted that whilst the tenant was the first claimant seeking relief from forfeiture, the mortgagee (GB) who had the real financial interest in the lease was driving the action. Accordingly if an assignment does not take place, it is likely that GB will be required to pay mesne profits for the period that the landlord has been kept out of occupation.

Given the current economic climate and the ongoing fragility of the retail sector, the inherent competing interests of landlords on the one hand and Insolvency Practitioners and mortgagees on the other, is set to continue.

© Copyright 2019 Squire Patton Boggs (US) LLP

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About this Author

Laura Crawford, Squire PB, Insolvency and bankruptcy lawyer
Partner

Laura Crawford is one of our two partners in the Leeds office specializing in restructuring and insolvency. She has over 30 years’ experience in the insolvency field having spent a number of years as a partner in another national legal practice. Before joining us in 2009, Laura spent a couple of years in industry on the board of a private investment company dealing with the turnaround of distressed companies.

She has extensive experience in all aspects of insolvency including non-contentious corporate restructuring, management and bank led distressed turnaround and, distressed sales...

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