18 December 2013

[2013] EWCA Civ 1626

Court of Appeal (Rimer, Kitchin, Christopher Clarke LJJ)

Whether landlords' rights to seek specific performance of an agreement to surrender leases survived an intervening insolvency

The Court of Appeal considered whether money paid into escrow as part of a deal to reduce a company’s commercial property liabilities by surrendering certain leases should be paid over to the landlords after the company entered administration, or whether it remained a company asset and the landlords would have to prove for the debt in the company’s subsequent insolvency.

The appellant landlords leased commercial premises to a company for periods of 10 to 15 years. The company soon suffered financial difficulties and entered into negotiations with the landlords seeking to surrender the leases.  Agreements were reached for a surrender of the leases, releasing the company from its obligations to pay yearly rent, in return, amongst other things, for the payment of a ‘price’ to the landlords on the date of completion of the surrender.

The company entered administration before completion of the surrender but after the ‘price’ had been paid into the clients account of the appellants’ solicitors.  The respondents, the company’s liquidators, sought directions as to whether the appellants could seek specific performance of the agreement to surrender and thereby obtain the money in escrow.

At first instance David Donaldson QC (sitting as a Deputy High Court Judge) refused permission to bring such a claim and stated that the landlords’ remedy was in forfeiting the leases and bringing claims in breach of covenant, which would require them to prove in the company’s liquidation.

The landlords' appeal was allowed.  The principle in In re Bastable, ex parte The Trustee [1901] 2 KB 518 that a trustee in bankruptcy was bound by a contract for the sale of land to the same extent as the bankrupt himself was followed.  Rimer LJ observed that prior to the administration the landlords had a right under the agreements to compel the company to complete the surrender by applying for specific performance of the release to the landlords to the escrow money.  The money in escrow was not therefore an asset of the Company and ordering specific performance would not offend the pari passu principle; indeed not to so order would be to prefer the interests of the company’s creditors over the landlords, when there was no principled reason to do so.

The court held that when money was held in an escrow account pending completion of the surrender of a lease, the lessee’s entry into administration was no justification for refusing specific performance of the agreement to surrender and the payment of the sum to the landlord.