A question facing many landlords is whether, when a tenant company faces insolvency and shows no intention of continuing to trade from the premises, they should take back the property and seek to relet it?
There are several key issues here, including:
- rates liability
- mitigating losses
- ability to recover from third parties and former tenants.
A landlord's decision has often turned on the type of insolvency faced by the tenant.
If a liquidator disclaims the lease:
- that will bring the lease to an end as between landlord and tenant but the landlord can still claim from former tenants and guarantors
- the landlord can also claim in the liquidation for ongoing liabilities such as rent and dilapidations
- if the landlord chooses to take back possession, for example in order to market the premises, then he will become liable for the rates. A well advised landlord can market the premises without taking possession and therefore avoid rates liability.
An administrator, alternatively a supervisor in a Company Voluntary Arrangement (CVA), does not have the power to disclaim but instead often invites the landlord to accept a surrender. Many landlords have been reluctant to agree for reasons which include:
- immediate termination of rights and obligations so that the landlord cannot claim for ongoing liabilities in the insolvency or from former tenants or guarantors
- landlords must take back possession and so becomes liable for rates.
Recent case law
The High Court has recently considered exactly this dilemma in the case of Cotswold Company Limited (in company voluntary arrangement) .The landlord sought to agree a surrender and maintain the ability to claim in the CVA for rent to the end of the lease term. The tenant company had taken a lease for a term of 15 years from 7 March 2003. In 2006 the company put forward proposals for a CVA. The company vacated the premises with no prospect of it continuing to trade from the property, leaving accrued arrears of rent and service charge of approximately £37,000 at the time of the CVA taking effect.
Terms of the CVA
In January 2007 the company's creditors approved the CVA, which was then binding on the landlord. Under the proposals there would be £1.45 million available for distribution to unsecured creditors in full and final settlement of their claims against the company. The debts covered by the CVA included "all present, future, actual, prospective and contingent liabilities of the company incurred before 10 December 2006". This case turned on whether the debts that would accrue in the future until lease expiry had been "incurred" before 10 December 2006 (the effective date of the CVA).
The landlord submitted a claim in the CVA for over £572,000. This sum included discounted liabilities under the lease to the end of the term.
After the CVA took effect, the landlord entered into a deed of surrender with the company. The introduction to the deed recited that the tenant's obligations to the landlord under the lease had been compromised and were now contained in the landlord's claim in the CVA, and that the landlord had agreed to accept a surrender of the lease for the purposes of re-letting the premises, to mitigate his claim in the CVA. However, the relevant clause was not very clear:
"Save in respect of the Landlord's right to claim within the CVA the Landlord releases the Tenant and the Tenant releases the Landlord from all liability claims and demands in respect of all the covenants and conditions contained in or otherwise arising in respect of the Lease ..."
Part of claim rejected by supervisor of the CVA
The landlord maintained his claim for the full £572,000 notwithstanding the surrender. His argument was that the liability had been 'incurred' before 10 December 2006, even though the amounts were not payable until later.
The supervisor accepted that part of the landlord's claim that related to obligations under the lease which had accrued prior to the deed of surrender (including dilapidations, rent and service charge). However, the supervisor denied that part of the landlord's claim which related to future rents, saying that those amounts had not been "incurred" before 10 December 2006. The High Court overruled the supervisor's decision saying that the terms of this surrender did enable the landlord to claim ongoing rents to the end of the lease.
The court confirmed that:
- a claim in respect of future rent was capable of being encompassed in a CVA (note that this was one of the reasons for the Stylo Barratt CVA being rejected by landlords)
- where a company intended to go on trading from the landlord's premises the tenant would be expected to pay the full rental as the price of continuing occupation
- where a company had no intention of occupying the premises, the CVA should ideally have expressly dealt with the lease obligations. Where it did not, then the binding compromise of the landlord's claim in the CVA could include future rents and service charges. The court held that amounts due under a lease are incurred when the lease is entered into, even though they are not payable until after that date. All that was left to be done for the purposes of the CVA was the quantification of the claim.
Points to consider
Where a lease is surrendered after a binding CVA has taken effect, a landlord must be careful to ensure that the surrender does not then reduce the amount that he can recover in the CVA. If a landlord rushes into a surrender he may find that he has inadvertently reduced or extinguished the amount that he can claim in the CVA for future rents.
In Artworld Financial Corporation v Safaryan and Others 2009, the Court of Appeal held that where a landlord allowed a third party to occupy a property to carry out redecoration, he was not doing so as caretaker, but had in fact taken a surrender by operation of law. In light of these two decisions, a landlord must be wary of inadvertently taking back possession by operation of law. Where the landlord has the ability to claim for future liabilities in an insolvency situation, the terms of the surrender are of critical importance and we would always recommend formally documenting the surrender.