The recent case of Lazari Investments Limited v Saville & others [2015] EWHC 2590 (Ch), states for the first time that financial prejudice suffered by administrators may not necessarily be enough to prevent forfeiture and that loss of rent is not the only prejudice landlords can suffer.
This recent High Court decision, which involved the Strada restaurant chain, should provide some comfort for landlords that often face frustrating experiences when a tenant goes into administration.
Insolvency context
The Insolvency Act moratorium protects the insolvent tenant from forfeiture and the landlord frequently finds that a third party is allowed to occupy its property on a licence from the administrators.
Negotiations for an assignment of the lease or for a new lease can be protracted. Landlords can feel constrained to negotiate with this party even though they would prefer to expose the property to the open market.
Facts
As is often the case, in Lazari Investments v Saville & Or, the landlord was offered a wholly inadequate covenant by the administrators in the shape of a newco as assignee and as guarantor. A licence to occupy was granted to newco, 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 proved that it could find a good quality covenant willing to pay a higher rent in the open market. Negotiations dragged on inconclusively over nine months with little attempt to address the inadequacy of the covenants on offer. The landlord therefore applied for permission to forfeit the lease pursuant to paragraph 43 of Schedule B1 of the Insolvency Act 1986.
Issues
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 (the insolvent tenant) 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.
Outcome
The landlord’s 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. 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.
Summary (Court guidance on following points)
The overriding message from Lazari v Saville is that:
- Where the administrator is suffering financial prejudice, this could still be so small as to not impede the purpose of the administration (in this case a loss of £87,000 with an estimated shortfall of £11 million).
- Payment of rent does not “buy” the administrator as long as he wants – administrations are supposed to be a temporary measure and delay will result in forfeiture. Therefore payment of rent does not justify delay. Nine months (during which time the administrators had concentrated on newco and had done little more towards marketing the lease) in this situation was too long.
- The landlord can suffer prejudice other than just loss of rent. The inability to let to other tenants is also prejudice.
- Landlords can usually refuse consent to assign where the company is a newco or the company in administration is not prepared to grant an authorised guarantee agreement.
Practical tips for landlords
- Be alive to any financial difficulty of a tenant, and from an early stage understand how this may potentially impact on your Estates’ strategic aims, or specifically in relation to that particular property/asset.
- As soon as you are aware a tenant has appointed administrators, contact Hempsons so you can understand what steps you should take to protect your position in relation to rent or forfeiture (so you can re-let the property).