A Shift In The Balance? re: Landlord Tenant Issues in the UK
On 14 September 2015, judgment was handed down in the case of Re SSRL Realisations Limited (In Administration), in which a landlord was granted permission to forfeit a lease by peaceable re-entry. The case will be of interest to insolvency practitioners and landlords alike – but for very different reasons.
The facts of this case are all too familiar: the tenant company SSRL entered administration, the business and assets of the company were sold and as part of the transaction, a licence to occupy was granted to the Newco purchaser, pending an application to the landlord for consent to assign the lease. The application for consent to assign the lease was refused on the basis that Newco had no covenant strength and had refused to enter into an authorised guarantee agreement. The landlord therefore applied for permission to forfeit the lease pursuant to paragraph 43 of Schedule B1 of the Insolvency Act 1986.
The main issues arising were (i) whether the purposes of the administration would be impeded by forfeiture of the lease, and (ii) if so, where the balance lay between the landlord’s and the creditors’ interests following the leading authority on this point – Atlantic Computer Systems.
The statutory objective of the administration of SSRL was to achieve a better result for creditors as a whole than would be likely if the company was wound up. The administrators claimed that forfeiture of the lease would result in a loss to SSRL’s creditors of a sum in the region of £650,000, being the premium that the administrators expected to receive for the lease from a potential assignee. The administrators also submitted that there had been no real prejudice suffered by the landlord during the period of the administration or the temporary occupation of the premises by Newco because the landlord had accepted full payment of the rent throughout this period.
The landlord submitted that forfeiture of the lease would not impede the purposes of the administration and that the financial loss the landlord would suffer from being denied the opportunity to grant a new lease to a new tenant at a higher rent meant that the balance was weighted in favour of allowing forfeiture of the lease.
The application for forfeiture by peaceable re-entry was granted on the basis that this would not impede achievement of the purposes of the administration. The administrators’ argument that they would be able to achieve a substantial premium for the lease was unsuccessful. In any event, the estimated shortfall to the secured creditor alone was £11m and so the value of the purported premium would be wholly insufficient to impede the purpose of administration in any real sense.
Further, the administrator’s valuation of the premium was based on an offer from a company within SSRL’s group. This was not deemed to be a reflection of the true market value of the lease. In pursuing attempts to assign the lease and failing to market the lease to external parties, the administrators had failed to demonstrate that other avenues were available in terms of achieving a premium.
Effectively, it was held that the landlord would suffer greater loss if permission to forfeit was refused than the insolvent estate would suffer, if permission were granted.
This case is a useful reminder that the moratorium is not a bomb shelter from creditor claims. In certain circumstances, depending on the balance of competing interests of the parties, the court will be minded to lift the moratorium in favour of particular creditors.
In order to defend successfully an application for leave to forfeit a lease, administrators must be able to show that the premises are genuinely required for the purposes of the administration. Moreover, they must persuade the Court that the lease has such value that its loss would be detrimental to the insolvent estate and demonstrably impede achievement of the statutory purpose of the administration. Any valuation should reflect the true market value of the lease – a valuation based on an offer from a party who is part of the same corporate group as the tenant in administration in unlikely to reflect market value. In addition, a landlord’s inability to grant a new lease is likely to be a significant factor in the balancing exercise advocated in Atlantic Computer Systems.
Similar to the Lazari GP Limited v Jervis case of 2012 (a claim by a landlord against the administrators of Game Retail (UK) Limited requesting permission to forfeit a lease), this case will be of particular interest to landlords because the court did not appear to be concerned that the landlord may be getting a “massive commercial advantage” or windfall by being permitted to forfeit the lease. This is not so much because it would gain a tenant with better covenant strength but rather, the landlord would have the opportunity to negotiate a deal with the new tenant at a higher rent than that payable under the existing lease. If the tenant had not gone into administration, the landlord would not be able to achieve a higher rent – hence the element of potential windfall.
In previous cases considered by the court outside of an insolvency context, the courts have disapproved of a landlord benefiting from a windfall in this way. Landlords have therefore been reluctant to submit evidence in forfeiture proceedings on potential new lettings, concerned that this may be held against them in the exercise of the court’s discretion as to whether to grant relief from forfeiture. The SSRL decision will therefore be of huge interest to landlords of insolvent tenants and may just be the incentive they need to adopt a more robust position.