An administrator? A landlord to an insolvent tenant? Consider the facts closely,

Background:

The tenant operated a restaurant (the Premises) out of The Brunswick Centre and was subject to a pre-pack administration. The first to third respondents were partners of the administrator, Zolfo Cooper LLP.

The administrators sold the assets and business of the tenant to Strada Trading Limited (STL), a newly formed subsidiary of the tenant. Subsequently the tenant granted a licence to occupy the Premises to STL, directly in breach of the alienation provisions of the lease. The administrators later sought formal permission to assign the lease, however this was (reasonably) refused by the landlord on the basis that STL had no trading history.

After a long period of failed 'negotiations', primarily centring on consent to assign the lease to STL and then other parties, the landlord sought permission from the court to forfeit the lease (permission being necessary because of the moratorium).

The administrator contended that to allow forfeiture would impede the purpose of the administration for a number of reasons. Most notably it argued that it would be able to assign the lease for a substantial premium which would benefit the administration. However, the hypothetical premium was ultimately held to be only £250,000 (specific to the original tenant) because (i) the lease only had 16 years left to run, (ii) the favourable rent provisions would be lost on assignment and (iii) the absence of an outdoor seating licence.

Decision:

It was held, that the landlord could forfeit the lease. The judge, Richard Spearman QC, reasoned that:

  1. even if a premium could theoretically be payable, there was no evidence that the administrators would be able to unlock it; and
  2. the premium was "so small in comparison to the estimated shortfall of £11m that…its lack of recoverability would not in any real sense impede the purpose of the administration"

Conclusively, the judge held that even if he was wrong to decide that the purpose of the administration would not be impeded by the granting of this application, the balancing exercise the court has to perform when determining whether to grant permission to forfeit would still fall on the side of the landlord.

Points to consider:

  • Administrators must be certain that the lease is of value to the administration when considering its market value. Ultimately, deferred consideration offered by a pre-pack subsidiary for the lease was notrepresentative of market value and would not be taken into account by the Court.
  • Where an administrator wants to frustrate a landlord's proprietary rights, they should think very carefully about how it can evidence the property's value to it. Administrators cannot ignore legitimate concerns of landlords and must therefore carefully consider whether deliberately breaching a lease is an appropriate cause of action. This case shows that in certain circumstances, this will not be the case. 
  • The judge was further critical of the absence of any significant effort on the administrator's part to market the lease to an arm's length third party. This counted against the administrator in the decision which was adverse to its interests. 

This case should act as a warning sign for administrators (pre and post appointment) that when considering a pre-pack, they should ensure that they deal with any proprietary interests diligently and with due care.

It should further embolden landlords into taking against administrators where an occupier of their property is foisted upon them without consent and there are better prospective tenants, with better security packages, in the market.