Strada landlord not prevented from terminating insolvent tenant's lease, court rules

Property litigation expert Ian Whitehead of Pinsent Masons, the law firm behind Out-Law.com, said that the decision confirmed that the moratorium did not give administrators "carte blanche to prevent landlords from exercising their contractual rights to terminate an insolvent tenant's lease". The test was whether forfeiture would be "detrimental to the purpose of the administration", he said.

"Here, where there were no grounds to believe that the administrators would be able to achieve a premium by assigning the lease - and, even if they did, such a premium would be small and would have no real impact in terms of reducing the tenant's liabilities given the level of shortfall - the landlord's interests in re-letting the premises should prevail over those of the creditors," he said.

"This was so even though the administrators' ability to achieve a premium was affected by the landlord's reliance on rights to insist on an AGA [authorised guarantee agreement] and terminate a stand-alone seating licence. In the event of an administration, a landlord remains entitled to exercise rights which it can invoke without legal process, whether or not these have a bearing on the likely effectiveness of the administration," he said.

The 1986 Insolvency Act restricts creditors from enforcing substantive rights against companies in administration in certain circumstances, without the permission of either the administrators or the courts.

The 1992 Atlantic Computers case, which is the leading case on this subject, requires courts to bear in mind "the relevant purpose of the administration", which is "to achieve 'a better result for the company's creditors as a whole than would be likely if the company were wound up (without first being in administration)'" when deciding whether to grant the creditor's application. The case requires the courts to carry out a "balancing exercise" between the landlord's interests and the interests of the company's other creditors when reaching its decision.

The administration in this case was a complex pre-pack administration, where a purchaser for some of the insolvent company's assets was already in place. The purchaser, Strada Trading Limited (STL), was incorporated on 21 August 2014 and had no trading history or independent financial strength.

The administrators issued STL with a 'licence to occupy' the premises in dispute while they attempted to negotiate formal lease assignment with the landlord, Lazari Investments Ltd. This licence was itself in breach of the lease. Lazari argued that it would suffer financial loss if it was denied the opportunity to grant a new lease of the property at a higher rent to a suitable tenant, and that the administrators had taken too long to find an acceptable assignee.

STL said that it would obtain the best result for the creditors if it was able to assign the lease itself at a premium. However, deputy judge Richard Spearman QC said that it was unlikely that it would be able to do so, as the landlord had terminated a separate outdoor seating licence - something that it was within its rights to do, he said.

"The purpose of the material provisions of the [Insolvency Act] is to provide a moratorium to enable the administrators to retain or realise assets for the benefit of the creditors," the judge said. "However, the legislation, the case law, and as far as I am aware the arguments before me, do not go so far as to suggest that a lessor is not entitled to rely on rights which it can invoke without legal process, even if it would further the purpose of the administration for the lessor to agree or to be prevailed upon not to rely on them."

"Even if these conclusions are wrong, the probability that the administrators would be able to obtain a premium, and the effect on the administration if permission to forfeit is given, are considerations which come into play at the second stage, when balancing the legitimate interests of the landlord and the legitimate interests of the creditors of the tenant. At that stage, the grounds for doubting that the administrators would be able to unlock whatever value the leasehold interest may have, and the modest effect on the administration if they are denied the opportunity to realise that value, are factors in favour of granting permission in accordance with the guidance contained in [the Atlantic Computers case]," he said.

Property litigation expert Ian Whitehead said that the decision showed that it was possible for the court's "balancing act" to go in favour of the landlord depending on the circumstances of the case.

"Pre-pack deals will leave a bad taste in the landlord's mouth where it is presented with a scenario whereby the tenant to which it granted a lease is to be replaced by an unknown entity of untested financial standing," he said. "Landlords will scrutinise the suitability of assignees closely where shopping centre premises are involved as they will be concerned to maintain the optimum retail and leisure mix for the particular locality. Administrators should be wary of presenting landlords with a 'fait accompli' without due consideration of landlords' legitimate contractual rights to object to inferior assignees."

"The court's decision should also provide landlords with comfort that if they will lose out on the opportunity to secure a desirable new letting as a result of being unable to terminate the lease, this factor will be taken into account when the court performs its balancing exercise between creditors' and landlords' interests. Payment of a sum equivalent to rent by the administrator will not mean that the landlord has not suffered prejudice," he said.