Tenant Insolvency: Landlords’ Rights In Troubled Times

The Problem

With company administrations up 50% in the last year, landlords are anxious to know what they can do if their tenant is next.

Under the Insolvency Act 1986 a petition for administration gives rise to a statutory moratorium, which prevents Landlords from pursuing their usual remedies for rent arrears or breaches of covenant.  Forfeiture proceedings or any attempt to distrain are permitted only with leave of the court or the consent of the administrator.

An additional problem for landlords is that, despite the lease provisions, someone other than the tenant or an approved assignee/undertenant may be allowed to take occupation of the premises without the landlord being given any opportunity to vet them, to object or to place appropriate conditions on their consent.

What can Landlords do about it?

One option for a landlord is to ask the administrator’s permission to forfeit the lease or remove the third party occupier. However, administrators are often unwilling to grant such consent, because they will argue it is in the interests of the other creditors to allow the tenant company or the third party to remain in the premises.

The second option is to seek the leave of the court, but how does the court decide whether to grant such permission?

The Court of Appeal gave guidance on when the court should grant such permission in Re Atlantic Computer Systems Limited [1992] 505, which included the following:

• The general rule is that, if a creditor seeks to exercise a proprietary right, which is unlikely to impede “the achievement of the purpose for which the administration is being pursued,” then leave should normally be given.
  
  
• Where there is a likelihood that the proprietary right will impede “the achievement of the purpose for which the administration is being pursued,” the court should carry out a balancing exercise, balancing the legitimate interests of the landlord and the legitimate interests of the other creditors.
  
  
• In carrying out that balancing exercise, more weight is usually given to the proprietary interests of the landlord. The reasoning behind this trend is that an administration for the benefit of unsecured creditors should not be conducted at the expense of those who have proprietary rights.

Recent Application of the Law

These guidelines were recently applied in Metro Nominees (Wandsworth) (No 1) and others v K Rayment and others, 16 October 2006 (High Court).

The Facts:

Administrators effectively sold an insolvent business (HPJ UK) and premises to a newly formed company (HPJ Retailing) for £1. HPJ Retailing was allowed into immediate occupation of the premises before gaining the landlord’s permission. Metro sought a court order authorising them to exercise a right of forfeiture.

The Arguments:

Metro’s argument was that HPJ UK had ceased trading and no longer needed the premises for that purpose. Therefore, granting leave to Metro to exercise its proprietary rights under the lease would not impede “the purpose for which the administration was being pursued” (i.e. a better realisation of the assets that would have been achieved by an immediate liquidation). The only person likely to be affected was HPJ Retailing, but the court was not obliged to have regard to HPJ Retailing's interests.

The Decision:

Even if the court took the view that giving permission was likely to impede the administration, the balance had to be struck between:

• the landlord and its proprietary rights; and
  
  
• the unsecured creditors (whose interests would be entirely unaffected by giving permission to forfeit, as the lease had already been sold by the Administrators).

The court in this case agreed with Metro’s reasoning.

Conclusion

Whilst a tenant going into administration is problematic for landlords, due to the statutory moratorium, the general trend highlighted by the above cases does give landlords something to be positive about.

Furthermore, with prompt investigation of the purposes of the administration and the question of whether there really is a genuine need for a third party company to continue in occupation, a landlord could utilise this general trend in negotiations with the administrator or the third party to boost their position and reach an acceptable compromise. This is especially important in the current climate, as landlords do not want to forfeit leases, since there are few high quality prospective tenants queuing at their doors.