A recent decision from the High Court has shed some light on the remedies available to landlords under insolvency legislation against tenants who enter into administration. The decision provides useful guidance on the ability of a landlord to exercise its right of forfeiture.
Lease terms usually provide that if a tenant goes into administration the landlord can forfeit the lease and regain possession of the property, provided the landlord has served a valid notice under Section 146 of the Law of Property Act 1925. However, as a result of the Insolvency Act 1986, in the case of a tenant in administration the landlord cannot exercise his right of forfeiture without either the consent of the tenants' administrator or permission from the Court.
Administration and assignment
The background to the case of Metro Nominees (Wandsworth) (No. 1) Limited and Others v K Raymant & Others was:
- In 1997 the company HPJ UK Limited entered into a 10 year lease with landlords, Metro Nominees. The Lease imposed a number of controls on the tenants' occupation or any disposal by the tenants and included a condition giving the landlord a right of re-entry if an administration order under the 1986 Insolvency Act was made against the tenant.
- In January 2006 HPJ went into administration. The Administrators sold the assets of the company to HPJ Retailing Limited and also agreed to assign any leases to them. HPJ Retailing took occupation of the premises.
- Later the Administrators applied to Metro Nominees seeking consent to an assignment of the lease to HPJ Retailing. Rent arrears amounted to £8,000 at the time of the application.
- Metro Nominees refused consent to the assignment because of the breaches of lease and the poor quality of the assignee's covenant. They did however intimate that they would accept an immediate surrender of the lease.
- The Administrators claimed they required control of the premises for purposes of administration and would not consent to forfeiture of the lease and peaceable re-entry.
- Metro Nominees applied to the Court for permission to exercise their right of forfeiture and this was challenged by the Administrator. The Administrator appeared to challenge the grounds on which forfeiture proceedings would be granted.
Permission granted - but not automatic
The Court granted Metro Nominees permission to commence forfeiture proceedings. It was not possible to permit immediate re-entry to the property as the Administrators had already issued proceedings for relief from forfeiture.
The Court accepted the arguments of Metro Nominees that forfeiture proceedings would neither disadvantage any of the creditors nor impede the administration process. The tenant in administration had already ceased trading and no longer required the premises. The Court was not obliged to consider the position of HPJ Retailing.
The Court did not accept the arguments of the Administrator that the notice by Metro Nominees had insufficient information to be effective. Adopting an established rule, the Court indicated that it would have been clear to any reasonable recipient that the tenant was in administration. The Court also rejected the argument that a court would not be bound to grant relief for forfeiture. The decision made it clear that the approach taken by the Court would depend on the facts of the case and relief from forfeiture was not automatic.
Balance between the competing interests of Landlords and Administrators
The decision in the Metro Nominees case highlights the careful approach of the Courts in addressing the competing interests of landlords and administrators in the case of tenants in administration. Although the Insolvency Act goes some way to freeze activity when an administrator is endeavouring to manage the assets, the protection under the Insolvency Act does not operate so as to negate the proprietary rights of a landlord.
The Court has indicated an approach which considers both parties' interests and generally, the issues relating to the landlord and tenant and the issues in relation to the administration process will be separated where possible. It is also clear from the judgment in this case that an administrator is expected to have considered the impact on the landlord in any decision by an administrator to withhold consent to a request to bring forfeiture proceedings. The delays by the Administrator in remedying breaches in this case was also noted by the Court as a consideration in relation to their application for relief from forfeiture.
In general landlords remain exposed. Administrators may still have some rights to occupy and trade from premises without necessarily paying rent. Further, it will be the provisions of the alienation clause in the lease which will govern the landlord's rights in dealing with consents to assignments and the covenant strength of proposed assignees.
Forfeiture is an area of law which the Law Commission proposes to reform. They published a report last October proposing a new statutory scheme to replace the existing provisions. For a detailed summary of the proposals, go to the November 2006 Edition of Open Door in the E-bulletin Archive on our website at: http://www.shepwedd.co.uk/knowledge/article/677-1089/could-it-be-all-change-for-the-law-of-forfeiture-/archive/?page=1
The position in Scotland
In Scotlland, the Insolvency Act applies similar provisions, requiring the consent of the administrator or the permission of the court, however of course the Law of Property Act is not applicable north of the border. The statutory arrangements in relation to forfeiture, called irritancy in Scotland, appear in the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985, which apply regardless of the actual terms of the lease, so any irritancy provisions in the lease will be subject to the statutory provisions and over-ridden by them if they conflict.
Whereas under the Law of Property Act, no notice is necessary in cases of non payment of rent, in Scotland there is a specific requirement for a notice of intention to irritate to be served on the tenant in cases of non payment, giving the tenant at least 14 days to remedy the breach. For non monetary breaches, the tenant must be given a reasonable opportunity to remedy, and the lease can only be irritated in the case of non monetary breach if, in all the circumstances a “fair and reasonable” landlord would do so. Next month's edition of Open Door will explore this aspect in more depth.
The law relating to irritancy in Scotland is also under review, with the Scottish Law Commission having produced a report on the subject in June 2003. The November 2006 Edition of Open Door also provided a summary of the proposals at http://www.shepwedd.co.uk/knowledge/article/677-1092/irritancy-of-leases-in-scotland-also-under-scrutiny/archive/?page=1