Key points

  • If a landlord wants to forfeit a lease after its tenant has gone into administration, it will need the consent of the administrators or the court
  • Where the tenant's business has been sold by the administrators on terms that the buyer takes on much of the risk in relation to the transfer of premises, forfeiture will not usually be an impediment to the administration
  • In these circumstances it is likely that permission to forfeit will be granted by the court

Background

When a tenant goes into administration, a moratorium applies so that no action can be taken against the tenant (e.g. to recover arrears of rent, or forfeiture proceedings) without the permission of the administrators or the consent of the court.

As explained in our alert on the case of Sunberry Properties Ltd v Innovate Logistics Ltd, where a landlord applies for permission to bring proceedings against a tenant in administration, the court maintains a discretion. In considering whether or not to grant leave to the landlord to proceed with its action, the court will normally balance the interests of the landlord against those of the creditors of the company, giving due regard to the proprietary interests of the landlord in accordance with the principles laid down in Re Atlantic Computer Systems plc.

Lazari GP Limited v Jervis

Lazari GP Limited v Jervis concerned an action by a landlord against the administrators of Game Retail (UK) Limited, requesting permission to forfeit a lease.

The Game administration was what is commonly known as a "pre-pack". In other words, a few days after administrators were appointed, a business sale agreement was signed with a company which had been specially formed for the purposes of the acquisition.

Under the business sale agreement, the buyer was granted a licence to occupy Game's various premises. The agreement provided that the buyer accepted that the grant of the licence might amount to a breach of Game's leases, and the buyer accepted both that risk and the risk that a landlord may refuse consent to the assignment of a lease to the buyer.

In due course the buyer did make what the court described as a "half-hearted" application for landlord's consent to assign, but this was refused by the landlord on the ground that the buyer was a new company with no trading history. The buyer did not pursue the matter any further.

In the meantime, the landlord had found another prospective tenant who was willing to take on the premises under a new lease, but the tenant imposed a condition that the negotiations proceeded in accordance with a certain timetable.

The landlord argued that the purpose for which the administration order was made would not be impeded by the grant of permission to forfeit. This was because the buyer under the business sale agreement had accepted the risk that landlord's consent for it to occupy the property may be refused. Accordingly, submitted the landlord, the balancing act which the court would normally perform in accordance with Re Atlantic Computer Systems plc did not arise.

The court agreed with the landlord. It ruled that it made no difference to the beneficial realisation of Game's property in the administration whether or not the landlord was permitted to exercise its proprietary right to forfeit the lease.

The purpose of the administration had been substantially achieved by the business sale agreement. As there was no impediment to the purposes for which the administration order was made, the court did not have to conduct a balancing exercise between the interests of the administration and those of the landlord.

In any event, the court thought that, had it been called upon to conduct such a balancing exercise, it would still have concluded that the balance came down in favour of the landlord. There was a real prospect that the landlord would suffer financial loss if denied permission to forfeit, in particular because of the impact on negotiations with the other prospective tenant.

Things to consider

Many pre-pack business sale agreements will contain similar provisions relating to the transfer of risk to the buyer that landlord's consent to assignment of a lease will not be obtained. This decision is therefore extremely useful to landlords faced with a similar situation.

It is particularly notable that the court did not appear to be concerned that the landlord may be getting a "windfall" by being permitted to forfeit the lease. This is not so much because it would gain a tenant with better covenant strength - this is arguably no more than the landlord thought it had before the existing tenant went into administration.

The point in this case is that the landlord had managed to negotiate a deal with the new tenant at a higher rent than was currently payable under the existing lease. If the tenant had not gone into administration, the landlord would not have been able to achieve this higher rent - hence the element of potential windfall.

Previous cases (outside the insolvency context) on whether tenants should be granted relief from forfeiture have sometimes disapproved of a landlord benefiting from a windfall in this way. Landlords have in the past therefore been reluctant to adduce evidence in forfeiture proceedings about negotiations for potential new lettings, in case this counted against them in the exercise of the court's discretion about whether relief from forfeiture should be granted.

These cases were not cited in Lazari and so the windfall argument was not before the court. The court was heavily influenced by the fact that the premises were not needed for the purposes of the administration, as the business had already been sold. It may be that the factors influencing the exercise of the court's discretion would be different where there is not only a disadvantage to creditors in permission to forfeit being given but also a corresponding positive advantage or windfall to the landlord.

There were also concurrent proceedings on foot between the parties in order to determine whether rent which was due on the quarter day immediately prior to the commencement of the administration was payable as an expense of the administration (the principle behind this question was in fact the subject of the ruling in Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd).

The administrators had tried to argue that the application for permission to forfeit should be adjourned for several weeks, so that it could be heard at the same time as the rent proceedings.

The court refused permission for the adjournment. It thought it clear that the application for permission to forfeit should be dealt with as soon as possible, in particular so as to enable negotiations to proceed with the new potential tenant. That the court recognised the urgency of this sort of application is another helpful aspect of this case for landlords.

For tips on things to consider when deciding whether or not to initiate forfeiture proceedings when a tenant goes into administration, see our alert "Terminate to accumulate?".