UK: Can A Landlord Forfeit The Lease Of A Company In Administration?

Following Judge Pelling QC's decision in Leisure Norwich (2) Limited & Others v Luminar Lava Ignite Limited (in administration) & Others [2012] EWHC 951 (Ch) (reported in the June 2012 edition of BDB's Property & Insolvency Bulletin), rent which is incurred prior to a tenant going into administration must be proved like any other pre-administration debt and cannot be paid as an expense of the administration.

As a consequence, well advised tenants, who are liable to pay rent quarterly in advance, will time their entry into administration to fall shortly after a quarter day. This allows the administrator to continue to use or trade from the premises until the next quarter day, in effect, rent free.

Unsurprisingly, this decision has been welcomed by administrators but less so by landlords. Landlords of insolvent tenants have found themselves stuck between a rock and a hard place. The moratorium triggered by the tenant's administration prevents any action being taken against the tenant (such as the recovery of rent arrears or forfeiture proceedings) without the consent of the administrators or the permission of the Court. This often leaves landlords unable to recover possession, forfeit the lease or claim unpaid rent, while the premises continue to be used by the administrators.

However, following the recent decision of Mr Justice Briggs in the case of Lazari GP Limited v Jervis, [2012] EWHC 1466 (Ch), in which the landlord of a tenant in administration was given permission to forfeit the tenant's lease, there is now some hope for those disgruntled landlords with insolvent tenants.

Facts

Lazari GP Limited (Lazari) was the landlord of a lease to Game Retail (UK) Limited (Game). Game went into administration on 26 March without paying its March quarter rent. Within a matter of days, the administrators sold Game under a 'pre-pack' sale arrangement to Baker Acquisitions Limited (Baker), the conditions of which included acceptance by Baker of the risk that the licence to occupy various leased properties previously occupiedby Game may breach the terms of the respective leases.

Baker went into occupation of the subject premises on 31 March under the licence to occupy. Lazari (reasonably) refused consent to Baker's occupation and sought to forfeit the lease on the basis of insolvency, unlawful occupation and rent arrears. Lazari had a prospective tenant who was willing to take on the premises under a new lease, but the prospective tenant hadimposed time restraints for the negotiations to be concluded. The administrators refused to consent to the forfeiture and Lazari was forced to apply to Court for permission.

Lazari argued that the purpose of the administration would not be prejudiced in any way by the immediate grant of permission to forfeit the lease. Accordingly, the balancing act set out in Re. Atlantic Computer System plc [1992] which the Court would ordinarily have to perform (namely whether there would be some impeding of the purposes for which the administration order was made) did not arise.

Judgment

Mr Justice Briggs agreed with Lazari and granted permission to forfeit the lease. The purposes of the administration had already been substantially achieved by the sale of the business and forfeiting the lease would not prejudice those purposes. It made no difference to the administration if Lazari was able to exerciseits right to forfeit as Baker had accepted the risk of Lazari doing this by occupying under the licence. Therefore, as Baker had assumed that risk, there could be no adverse consequences to the administration. No balancing exercise needed to be performed.

The Court went on to state that if it had been required to carry out the balancing exercise, it would have found in favour of Lazari in any event. The administrators could not identify any adverse consequence that would result from the forfeiture of the lease whereas there was a real prospect that Lazari would suffer financial loss if it were to lose the prospective tenant.

Comment

This case is an encouraging reminder for landlords with insolvent tenants that their rights are not necessarily blocked by the moratorium. However, it should not be seen as setting a general precedent. Had the administrators been able to demonstrate that forfeiture would impede the achievement of the purpose of the administration, permission may well have been refused. The Court also commented on the half-hearted approach Baker took in trying to obtain Lazari's consent and it may be that if, in a similar situation, a more determined and diligent approach had been taken, the Court might have had more sympathy.
In any event, if a tenant goes into administration, a prudent landlord should look carefully at the purpose of the administration order and consider whether forfeiture would actually impede the achievement of its goals.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.