Ireland: Insolvency Implications For Commercial Leases

Last Updated: 14 December 2011
Article by Sarah O'Mahony

It is symptomatic of the current financial climate that we are frequently asked to advise on a landlord's remedies against the corporate tenant of an occupational lease in circumstances of the latter's insolvency. The various categories of corporate insolvency and the landlord's position are considered below:

Liquidation

The landlord's position vis-à-vis rental payments due to him pursuant to the lease (including rent, service charge and other payments expressed as being payable to the landlord thereunder) differs depending on whether the same accrued prior to the commencement of the liquidation (in respect of which the landlord ranks as an unsecured creditor), or subsequent to the commencement of the liquidation. In respect of the latter, if the liquidator elects to occupy the property (which is typically done in consultation with he landlord for an agreed period) and where the property is used for the benefit of the liquidation and is necessary for the winding up, then the rent and other expenses are deemed an expense of the liquidation.1

Notwithstanding the express terms of a comprehensively worded forfeiture clause, a landlord cannot forfeit a lease for the fact of the insolvency until twelve months have expired since the commencing of the liquidation. This protection does not extend to the landlord's entitlement to forfeit for non-payment of rent, which is unaffected (although a liquidator, like a tenant, will enjoy an equitable right to apply to court for relief against forfeiture for non-payment of rent). The liquidator will also enjoy certain statutory protections which are afforded to tenants, and which require a landlord to serve a notice of non-financial breach of covenant upon the tenant, which specifies the relevant breach of covenant and requires to be remedied.

If a liquidator has no use for the property, he will seek to negotiate a surrender of the lease to the landlord. If the landlord does not accept the lease, the liquidator has the option to go to court to disclaim an 'onerous' lease, at any time within the 12 month period commencing on the liquidation2. An onerous lease is described as any lease which constitutes a liability to the holder (so it is safe to assume that most commercial occupational leases would be deemed to be onerous for the purposes of this test).

This can leave the landlord in a situation where he is in a position of uncertainty for a prolonged period of time. If negotiations are not advancing satisfactorily between the liquidator and the landlord, then the landlord can force the liquidator to decide whether or not to disclaim a lease by serving a 28 day notice on him, within which period the liquidator has to confirm whether or not he intends to disclaim the lease.3 If the liquidator is occupying the premises in a manner which allows the rent to be deemed an expense of the liquidation, then this ceases to be the case as soon as the liquidator serves notice of intention to disclaim.

Upon a hearing of an application for disclaiming of a lease, a court will consider the amount of compensation which is payable to the landlord and the landlord must prove in the liquidation as an unsecured creditor. If the liquidator wishes to assign the lease to a third party, and the lease requires the landlord's consent, the landlord can make such consent conditional upon the discharge of arrears and it is legitimate for the liquidator to discharge pre-liquidation rent as an expense involved in realising the assets for the benefit of the creditors (notwithstanding its unsecured status).

Liability of a guarantor/Rent deposits

A disclaimer of a lease in liquidation will not usually impact upon the position of a guarantor of the lease, and the guarantor remains liable to the landlord for the accrued arrears. If the landlord has a contractual entitlement to withdraw from a rental deposit account, he cannot do so to the extent that the right accrues post-commencement of the liquidation, save in circumstances where the landlord has taken a fixed charge over the rent deposit account (in which case the debt owing is, to that extent, secured, provided the appropriate requisite filings in the Companies Registration Office have been completed).

Receivership

The entitlement of a liquidator to disclaim an onerous lease does not extend to a receiver and most occupational leases will entitle a landlord to exercise a forfeiture and re-entry provision, on the appointment of a receiver over any of the assets of the tenant company (but subject to the usual statutory and equitable reliefs against forfeiture being available). There is no moratorium on the exercise by the landlord of those remedies, and the ability of the landlord to pursue a guarantor or to have recourse to a rental deposit is unaffected.

A receiver, like a liquidator, is liable for payments under the lease only to the extent he uses the leasehold property during the receivership for the purposes of the receivership. Any rent arrears which accrued prior to the appointment of the receiver constitute an unsecured debt.

Examinership

An examinership is a process pursuant to which an insolvent company, which is shown to have a reasonable prospect of survival, is afforded court protection for a defined period (to a maximum of 100 days). During this period, no action can be taken by a creditor - including a landlord - against that company (or a guarantor of that company's liabilities), which would otherwise be open to the creditor. As with the appointment of a liquidator, the examiner is not responsible for payment of rent and liability remains with the company. However, the landlord can call upon the examiner to "certify" the rent as an expense necessary for the survival of the business, giving it priority over other claims. This however is entirely at the discretion of the examiner.

If a scheme of arrangement (rescue plan) is proposed by the examiner and approved by the court, it then makes whatever orders are required to give it effect, and the examinership and court protection are at an end. While arrears of rent due as at the date of presentation of the examiners petition may be written down under the scheme of arrangement, it cannot provide for an extinguishment or reduction of future rental payments. In practice, the rent payable under the lease is usually re-negotiated before the scheme of arrangement is agreed. Any write down of the rental arrears can be pursued by the Landlord against any guarantor.

Another option open to the examiner is to apply to court to vest in themselves, all powers which they would have if they were appointed as a court-appointed liquidator, to include an entitlement to disclaim an onerous lease, or the insolvent company itself can seek to repudiate the lease by way of application to the High Court. A repudiation or disclaiming of the lease crystallises the debt owing to the landlord and the amount so quantified can be reduced by the examiner as part of the scheme of arrangement. It is of course also open to the landlord and the examiner to negotiate a surrender of the lease back to the landlord and the landlord can seek to recover part of the arrears of rent owing as part of the consideration.

It is important to be aware that in the case of an examinership where a scheme of arrangement for creditors is being proposed by the examiner, the landlord must notify the guarantor and give him the option of voting on the proposed scheme of arrangement. If this procedure is not completed, the guarantee will no longer be enforceable. However, if the scheme of arrangement has been put in place without the consent of the landlord, it is free to pursue the guarantor. It should also be noted that if the guarantor has to pay the landlord under the terms of the guarantee, it itself can claim as an unsecured creditor against the tenant.

The position of sub-tenants

The disclaiming or repudiation of a lease will not affect a sub-tenant but the sub-tenant will need to pay the rent (or apportioned part thereof) and perform the covenants in the headlease if it wishes to avoid forfeiture or ejectment proceedings. A sub-tenant can also apply to court in circumstances where an application is being made by a liquidator to disclaim a lease and apply to have the headlease vested in them; in a situation where the landlord and the liquidator negotiate a surrender of the lease, the position of the sub-tenant is again protected such that it is entitled to apply to court and the court may order that the sub-tenant steps into the shoes of the insolvent superior tenant. If however the sublease is one to which the Landlord and Tenant (Amendment) Act of 1980 applies (i.e. where the sub-tenant holds a statutorily-defined "tenement"), a sublease will not terminate where the superior lease is terminated "before its normal expiration" and the landlord becomes the landlord of the sublease (and the relationship is governed by the terms of the sublease rather than the superior lease). The sub-tenant holds the premises for the greater of the sub-rent or the proportion of the head rent fairly attributable to the premises.

It should also be borne in mind that a landlord is entitled by statute to require a sub-tenant to pay a rent directly to them in a situation where the tenant is in arrears of rent to the landlord, without enforcing any breach of covenant in the head lease against its own tenant.

Footnotes

1 There has been some case law to the effect that where a liquidator occupies property in order to sell it, the rent for that period may constitute an expense of the liquidation.

2 This 12 month period runs from the date of the liquidator becoming aware of the fact that the lease in circumstances where its existence is not known to him.

3 This may encourage the liquidator to commence negotiations to surrender the lease to the landlord, during which the landlord must weigh up the proportion of the arrears due under the lease which it would be likely to recover as an unsecured creditor as against what, if any, the liquidator is amenable to pay in partial discharge of the arrears (by way of premium payable on the surrender).

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.

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Authors
Sarah O'Mahony
 
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