Real Estate Matters – Autumn 2019


Injunctions against protestors (or ‘persons unknown’): Legal and[...]
Why is Canada Goose v Persons Unknown of interest? Parties often seek an injunction when […]
Why is Canada Goose v Persons Unknown of interest?
Parties often seek an injunction when the stakes are high and the pressure is on. Some action needs to be taken or prevented, usually with real urgency, to enable a deal or a development to proceed; to prevent funds being lost or trading disrupted; or to ensure that legal rights are enforced.
Injunctions are a highly effective weapon in a litigator’s arsenal and they can even achieve results when the identity of any wrong-doers or potential wrong-doers is unknown – for example when dealing with trespassers or protestors.
However, as the recent case of Canada Goose UK Retail v Persons Unknown [1] demonstrates, the granting of an injunction will not be taken lightly by the courts. Amid the pressure and the practicalities of injunction litigation, parties must not underestimate the importance of getting the legalities and the procedural aspects absolutely right.
What are the implications?
In the Canada Goose case the High Court refused to continue an injunction, which had previously been granted on an interim basis, against animal welfare protestors outside Canada Goose’s Regent Street store.
The following essential legal and practical implications arise for any business applying for an injunction against persons unknown.
Unlawful conduct
- There must be a real and imminent risk of a tort being committed to justify anticipatory/pre-emptive injunctive relief [2]. Conduct which is merely irritating or inconvenient for the applicant may not necessarily be unlawful and sufficient to found an injunction.
Terms of the injunction
- The terms of the injunction must correspond to the threatened tort and must not be so wide that they prohibit lawful conduct.
- The terms of the injunction must be sufficiently clear and precise as to enable persons potentially affected to know what they must not do.
- The injunction should have clear geographical and temporal limits.
As an aside, whilst a proposed injunction should not be any more wide than strictly necessary, it should, however, be comprehensive. In another 2019 injunction application against persons unknown [3], the successful property owner obtained an injunction which not only restrained further trespass at the site, but also secured removal from YouTube and other websites of footage of the trespass. In a world where everyone with a phone can film and post footage, consideration should be given to requesting a similar order in any case where there is evidence that internet footage of a trespass has encouraged others to do the same.)
Identifying potential defendants
- It must be impossible to name the person[s] likely to commit the tort unless restrained.
- Where the identity of any individuals becomes known, those persons should be added to the proceedings as named defendants as soon as possible.
- The applicant should endeavour to narrow the class of persons unknown, to enable them to be identified so far as possible. In practical terms this could involve describing appearances and/or actions at certain times, adducing CCTV/bodycam footage, etc.
Procedural requirements
- It must be possible to give notice of the injunction.
- In addition, service of the claim form, as well as of any interim injunction, must be properly effected, so as to give all persons potentially affected the opportunity to raise a defence.
WM comment and practical advice
In the Canada Goose case, the terms of the proposed injunction, and the class of persons unknown against whom it was sought, were too wide. The court was therefore concerned that, if ordered, the proposed injunction would interfere with lawful protest and would impact innocent persons. The applicant also fell short procedurally, in that it had failed to properly serve the claim form, as well as the interim injunction order. Any one such error might prompt a court to refuse an injunction.
This case is therefore a cautionary reminder that the courts will not take the granting of an injunction lightly – certainly not against persons unknown, and not even where an earlier interim injunction has been ordered.
In relation to any injunction against ‘persons unknown’, applicants/claimants should focus on the specific actions or risks against which they are trying to guard, and should not try to obtain any wider injunction than is strictly necessary. Applications and notices should use clear, plain English wording and, where possible, should not include legal jargon or terminology.
Applications for injunctions usually arise in pressured situations and there is often real urgency. However, remaining calm throughout the process can help to keep stress levels, and mistakes, to a minimum; as can ensuring that you have an experienced, expert team around you.
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[1] [2019] EWHC 2459 (QB)
[2] known as quia timet relief
[3] Ansco Arena Ltd v Law [2019] EWHC 835 (QB)

Tenant and third party contributions to cost of[...]
Walker Morris Housing Management & Litigation specialists Karl Anders highlights a recent Court of Appeal […]
Walker Morris Housing Management & Litigation specialists Karl Anders highlights a recent Court of Appeal case concerning on account service charge demands and the potential for a set-off to be applied in respect of anticipated third party contributions.
Why is Avon Ground Rents v Cowley of interest?
The calculation and payment of service charges frequently prompt landlord and tenant disputes. The recent Court of Appeal case of Avon Ground Rents Ltd v Cowley & Ors [1] is of interest to landlords and flat owners and all those involved with residential property management and investment. It provides authoritative guidance on when it would be reasonable to apply an offset when demanding on account service charges in circumstances where third party contributions are anticipated.
What are the key takeaways?
- Where residential long leaseholders are contractually obliged to pay a variable service charge, section 19 (2) of the Landlord and Tenant Act 1985 (the LTA) applies. Section 19 (2) states that leaseholders are not required to pay any greater amount than is reasonable before the associated costs are incurred by the landlord.
- What is reasonable should be assessed on a case-by-case basis. All relevant circumstances should be taken into account in making that assessment.
- Where there is an effective insurance policy in place (or where there is a possibility that any other third party contribution may apply) in respect of service charge expenditure, those are relevant circumstances to take into account when assessing what is a reasonable amount for the leaseholder to pay.
- When embarking upon a scheme of repair or maintenance works, landlords and managing agents should assess whether any third party contribution is likely and, if so, how much, when assessing what to demand via the service charge. They should not simply charge all anticipated costs to leaseholders with a view to carrying out a balancing/refunding exercise later.
What happened in the case?
In Avon Ground Rents v Cowley remedial works were required to repair water damage at a mixed commercial and residential development. The tenants were obliged under their leases to contribute to the cost of the works through the service charge. The service charge was payable in advance based on an estimate of the anticipated expenditure.
There was no issue as to the estimated costs of the works, nor as to the apportionment between the tenants. However, the NHBC had agreed to contribute under its warranty for the premises, albeit the amount of that contribution had not been determined. The landlord sought advance contributions in respect of the full costs of the works from the tenants.
The landlord argued that the NHBC contribution would be taken into account, and refunds given to the tenants, as part of a subsequent balancing exercise.
The First-Tier Tribunal and the Upper Tribunal had held that it was not reasonable to require an advance payment for the full costs in circumstances where an amount was anticipated from the NHBC. The landlord appealed to the Court of Appeal.
The landlord’s appeal was dismissed. The Court of Appeal explained that, whilst the lease provisions were the starting point, section 19 (2) LTA is a statutory overlay which modifies tenants’ obligations so that they are not required to pay any greater amount than is reasonable before the relevant costs are incurred. What is reasonable should be assessed in light of the facts of the particular case, and here the landlord’s argument that no account should be taken of the likely sums to come from the NHBC ignored the reality.
It was relevant to the Court of Appeal’s finding that, not only was there an insurance policy in place, but also that the landlord had agreed to give credit for any amount received from the NHBC, and that the overall anticipated costs were not hypothetical or disputed. The decision means that landlords and/or their managing agents will now need to consider the possibility of third party contributions and, if appropriate, make allowances in respect of the timing of and/or the amounts that are included in on account service charge demands.
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[1] [2019] EWCA Civ 1827

Flexible office space: Beware too much informality
Specialist real estate litigator David Manda looks at the popularity of, and potential pitfalls associated […]
Specialist real estate litigator David Manda looks at the popularity of, and potential pitfalls associated with, flexible office space, and offers his practical advice.
Commercial context
Political and economic change in recent years has simultaneously created uncertainty (largely due to Brexit), and opportunity through technology and expanding sectors. This is evidenced by growing numbers of entrepreneurial start-ups and SMEs. These market forces have created increased demand for a relatively new form of occupancy – flexible office space.
What are flexible office arrangements?
Flexible office arrangements are rented work spaces that are fully serviced and maintained by an operator. They can vary in size from a single desk to an entire floor, depending on the occupant’s needs which may change over time. The take-up for flexible offices increased by 150% in 2017, and further exponential growth is predicted as not only start-ups and SMEs, but also larger corporates, increasingly embrace modern, flexible and fluid working practices.
At first glance, it’s not difficult to see why this form of occupancy has become so popular. Agreements can be made, and occupation can commence, quickly and easily. Arrangements are typically made via a licence for any duration that suits the occupant. This creates a flexible and practical arrangement, ideal for coping with an ever-changing market, and providing room for businesses to grow and develop how and where they wish.
However, the flexible office space model can have implications that are legally problematic and that can even compromise businesses’ commercial interests. As such, an important question is whether the traditional lease/licence system can be better deployed to meet today’s fast-changing and dynamic landscape.
Flexibility vs Security
It is common for property owners to let others in to occupation of their premises on the basis of informal discussions as to terms and payment, without that arrangement ever being formally documented. Similarly, in the case of flexible office arrangements, it is common for occupiers to sign what they think are serviced office ‘licences’ without taking legal advice and without ever really understanding the legal and commercial implications.
In fact, case law [1] confirms that if a person or business occupies premises, the freehold or superior interest of which is owned by somebody else: (a) for a term (that is, for a fixed period or for a period which can be ascertained by reference to a termination notice period); and (b) exclusively (that is, without interruption and with the ability to exclude the owner or any other party at any or at certain times) then, regardless as to how the occupation arrangement is named, documented or otherwise referred to, it will be – as a matter of law – a lease, and not a mere licence.
The distinction is important. In particular, a licence is simply a personal, contractual permission for the licensee to do something – in this context to occupy land. A licence does not confer any proprietorial rights, it cannot be assigned and it does not survive any change in the ownership of the freehold/superior interest. Crucially, a licence does not confer any security of tenure, and so a licensee’s position is precarious.
In contrast, a lease (or a tenancy, those terms are interchangeable) is much more than a contractual permission – it is an estate in land. A lease can therefore be bought and sold; it survives changes in ownership of any superior interests in the land; and, where it is a lease of commercial premises and the requirements of Part II of the Landlord and Tenant Act 1954 (the 1954 Act) are met, it affords the tenant security. That means that the tenant’s occupation cannot be brought to an end, even following expiry of the lease term, unless and until the landlord can establish (at court if necessary) one or more of certain limited statutory grounds for repossession.
Whilst it is understandable that businesses may not be attracted to the commitment of a long term lease, protracted negotiations over terms, or potentially onerous and often costly repair and maintenance obligations, there is an important line between flexibility and precariousness. Leases can provide security where a licence cannot.
A crucial factor in any business’ success is the goodwill it builds up in the locality. That can quickly be lost if the occupier is forced to quickly relocate. Similarly, if a business relies on its particular location for, say, networking and knowledge sharing opportunities or the commercial advantages that arise from zonal clustering, occupying under a mere licence can represent a real vulnerability.
From the property owner’s perspective, one risk is the potential breach of alienation provisions if the owner is itself a tenant or licensee. Another very significant risk if the owner mistakenly believed that an occupier had a licence only is that it could actually face a security of tenure claim and a request for a 1954 Act renewal lease. That could, of course, delay or even prevent any recovery of possession or other proposed dealing with the property.
Beware too much informality
So, a misunderstanding on the part of a property owner or occupier as to the correct legal nature of any occupation of commercial premises can have devastating consequences. Unfortunately, that can often arise with flexible office arrangements.
The legal foundation on which many flexible office arrangements are built is shaky. The desire for speed and flexibility means that many comprise only informal, often verbal agreements, pursuant to which businesses take up exclusive occupation of space in return for regular payments to the serviced office owner/operator. That sort of situation generally results in the law implying a 1954 Act-protected lease, many of the terms of which will not actually have been negotiated between the parties and, of course, one or both parties may only have intended to grant or take a licence.
Quite apart from alienation and security of tenure issues, oral agreements are difficult to prove evidentially, and are therefore difficult to enforce if and when parties’ understandings of their respective responsibilities and liabilities differ.
Even where written serviced office agreements are put into place (and regardless as to whether they are genuine licences or 1954 Act-protected leases) the informal, fast-paced and ever-changing nature of the market means that variations as to occupation arrangements (for example, as regards to the number of desks or parking spaces needed, the particular services to be included, the sums payable, and so on) are often discussed and agreed orally only. As well as the potential for misunderstanding and evidential issues, that can result in parties inadvertently ending up in breach of express ‘No Oral Modification’ provisions (which are typically included in the ‘boilerplate’ of many licences and other commercial contracts). That happened in the recent case of Rock Advertising v MWB Business Exchange Centres Limited [2], which went all the way to the Supreme Court before it was resolved (at significant time and no doubt great expense) in favour of the licensor who was suing for arrears, rather than the occupier who believed it was only liable to pay an informally agreed reduced payment schedule.
The greatest benefit of flexible office arrangements can, therefore, also be the biggest downfall. Too much of a focus on flexibility and informality can mean that essential legal realities are overlooked or misunderstood. That can put parties to the time and expense of dealing with disputes and, paradoxically, it can lead to intractability in property ownership or occupation.
What are the practical considerations?
Firstly, businesses considering offering or taking flexible office space should consider their position from a practical aspect. By way of a few examples…
If you wish to offer flexible office space, does any existing lease or licence permit the sharing of or parting with possession, or will additional consents be required? To what extent will any flexible office arrangement impact your own business; and to what extent are you willing to effectively become a ‘landlord’?
Businesses considering taking flexible office space should consider whether the image and goodwill of their business are compatible with flexible offices. For example, if a business has a more traditional outlook or is inherently connected with its locality, this might be incongruous with flexible offices? Do you know who else occupies or is likely to occupy? Might your business benefit from clustering with others working in the same industry or environment; or might it be counterintuitive to share office space if that leaves you vulnerable to sitting in close quarters with competitors and/or at risk of exposing trade secrets or case sensitive information?
Owners and occupiers alike will should assess their needs in relation to the capacity of the building. If, say, a business requires a high volume of services such as wi-fi usage, data and postage, they may exceed the available capacity. Rights to charge for, or terminate as a result of, excessive usage are issues that should be considered upfront and specifically negotiated on a case-by-case basis.
What might be the best option?
There is no doubt that the commercial needs and desires of many of today’s business occupants have shifted away from the traditional long-term lease structure, and the popularity of flexible offices shows no signs of abating. On the other hand, increased certainty of income stream, clarity of terms, and higher portfolio valuations may mean that traditional lease models continue to be more attractive to landowners and funders. So, is there a middle ground – and one without the pitfalls associated with overly informal serviced office arrangements – that might represent the best solution?
Contracting parties often believe that, where a short term occupancy arrangement is contemplated, that does not merit the putting into place of a formal lease. Parties often believe that the time and costs involved in instructing a solicitor and completing the necessary legal documentation are not justified, and they worry that leases can be too much of a commitment. However, that can be a false economy.
In fact, the best advice is for office owners and [proposed] occupiers respectively to speak to a real estate specialist to ensure that they understand exactly what they each want to gain out of any occupancy arrangement; the responsibilities that they are prepared to take on; the risks that they want to avoid; and what is the best legal means of achieving those ends.
In the majority of flexible office arrangements, a short term or periodic lease that is contracted out of the security of tenure provisions of the 1954 Act, but which contains provisions to prevent the owner from terminating without notice, will suit, and protect, both parties. Where a flexible office arrangement genuinely does not result in any exclusive occupation of premises (and such situations are rare and should be assessed on an individual basis by a property law specialist), a simple licence will suffice. Either way, more often than not, completing a simple but formal lease or licence document upfront will save significant time, cost and inconvenience in the end – and will therefore be entirely consistent with the aims of the flexible office model.
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[1] Street v Mountford [1985] 1 EGLR 128
[2] See our earlier briefing for further advice and information on this case.

Withholding consent to change of use: Back to basics
What does it mean when a landlord is required to act reasonably in the context […]
What does it mean when a landlord is required to act reasonably in the context of consenting to change of use? In this article Real Estate specialist Andrew Maclean looks at the key aspects which the courts will consider when considering whether it is reasonable for a landlord to withhold its consent to a change of use, and provides practical guidance for landlords, tenants and agents alike.
Landlord and tenant relationship and nature and location of the land
It will not generally be reasonable for a landlord to withhold consent for any reason which is entirely unconnected with the landlord and tenant relationship and/or with the subject matter of lease.
That does not mean, however, that the landlord is not also allowed to take into account wider factual circumstances. For example, the nature and location of the land will be relevant and the courts will consider what would be reasonable in respect of the surrounding land. As a general principle, permitted user clauses should not be enforced in any more restrictive manner than is necessary to protect the value of a landlord’s property, including any adjoining or neighbouring premises of the landlord.
Rent and value of property
It is likely that it would be reasonable for a landlord to withhold consent where the change of use is likely to reduce rent attainable on a review or renewal, to reduce future value of the property and/or to deter future tenants.
In International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1] the landlord refused to give its consent to an assignment of the lease on the ground that the proposed use would negatively impact the value of the landlord’s reversionary interest.
The court held that this refusal by the landlord was unreasonable, because by the end of the term of the lease the value of the site as a whole and the letting value of the property would not have reduced and the landlord had no grounds for reasonably apprehending any damage to its interest in the property.
Restrictions on the landlord’s freehold title and breach of covenant
In some cases, there may be a covenant on the landlord’s freehold title which restricts how the land may be used. If so, or if there is any possibility that the proposed use would potentially breach any existing covenant, it is likely to be reasonable for a landlord to refuse consent.
“Consent not to be unreasonably withheld or delayed”
If a permitted use clause contains the wording “not to be unreasonably withheld or delayed”, the landlord cannot refuse the change of use arbitrarily and must provide a timely response.
An unreasonable delay or the imposition of unreasonable conditions would constitute an unreasonable refusal. Similarly, where a reasonable time has passed since the tenant made the application, providing all information reasonably necessary for the landlord to consider such application, a failure on the part of the landlord to give a decision either way this amounts to an unreasonable withholding of consent.
What is a reasonable time? That will depend on the facts of any particular case, but it will generally be measured in days or perhaps weeks, rather than months.
Burden of proof
The burden of proving that consent has been unreasonably withheld falls to the tenant, unless the landlord has not given reasons. If the landlord has not given reasons, the landlord must prove it has acted reasonably.
Practical advice
If consent from the landlord is required under the lease, consent in writing should be requested by the tenant in clear and unambiguous terms, so that there is certainty as to when the application was made and what it proposes. Tenants or their agents should also endeavour to anticipate what information the landlord will require in order to properly consider the application and to provide it upfront, so as to limit the potential for the landlord to delay matters by having to ask for it themselves.
If and when a landlord or agent receives any application for consent, it should proactively obtain all information necessary to enable it to properly consider such request, and it must act quickly so as to avoid the possibility of a claim of unreasonable delay.
When deciding whether or not to grant consent, landlords should remember that reasons for refusing consent cannot be entirely unconnected with the landlord and tenant relationship and the terms of the lease. Over and above that, landlords can legitimately consider matters such as whether it would it be reasonable to refuse consent on the basis of any wider estate; whether the change of use would affect the reversionary value of the property; and whether it would deter any future tenants.
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[1] [1985] EWCA Civ 3

Supreme Court considers reasonableness of landlord’s refusal of consent
Following on from his ‘Back to basics’ article, Andrew Maclean highlights a recent Supreme Court […]
Following on from his ‘Back to basics’ article, Andrew Maclean highlights a recent Supreme Court decision on whether a landlord acted reasonably in refusing a tenant’s application for consent to apply for planning permission for change of use.
Why is this case of interest?
Where a tenant needs its landlord’s consent to deal with its property in some way – whether that be to assign or sub-let the premises, or to change its use, for example – matters can frequently become contentious as the parties’ interests in, and intentions for, the property can differ greatly. Most modern commercial leases, and the Landlord and Tenant Acts 1927 and 1988, try to regulate any such situation by imposing an obligation on the landlord not to unreasonably withhold or delay consent. However, what is reasonable will depend on the particular circumstances of any individual case. Despite case law providing some guidance for landlords, tenants and agents, the question sometimes falls to the courts to decide.
The case of Sequent Nominees Ltd v Hautford Ltd [1] is of interest because the question of whether the landlord acted reasonably in refusing a tenant’s application for consent went all the way to the Supreme Court, and even the highest court in the land could not reach a unanimous decision. The case therefore demonstrates how arguments in such cases can be finely balanced.
The case is also a cautionary reminder that the outcome of any litigation can be uncertain, and that pursuing a case to trial can ultimately prove costly – in terms of time and money – for both parties. Wherever possible, therefore, it may make commercial sense for parties to negotiate a compromised solution.
Whilst the facts and lease provisions in the Hautford case are relatively unusual [2], the judgment provides a helpful summary of relevant principles and authorities which can help landlords, tenants and agents to assess reasonableness in this context. It also emphasises the importance of considering any application for consent in an holistic manner, which takes into account the landlord and tenant relationship, the terms of the lease as a whole, and the wider factual and legal circumstances.
What practical advice arises?
Landlords, tenants and agents should note that covenants that are subject to the landlord’s consent will be automatically upgraded to a fully qualified covenant under section 19 (1) of the Landlord and Tenant Act 1927. The Landlord and Tenant Act 1988 then applies to require that the landlord must act reasonably when giving or refusing consent. What is reasonable will differ depending on the legal and factual circumstances of any given case. If in doubt, parties should seek specialist legal advice as to whether a landlord’s decision is reasonable.
Where, as in this case, properties have mixed residential and commercial uses and tenants seek consent to increase residential use, landlords should note the risk of enfranchisement [3] and should take that into account when assessing reasonableness. On the one hand, there are circumstances where the risk of enfranchisement is already so great and so obvious that it is not materially increased by the tenant doing that for which he seeks the landlord’s consent. The landlord’s refusal might not, therefore, be reasonable. (Leases with long terms that allow for tenants to change the use of the property to solely residential, either by obtaining planning permission or through the construction of the user clause and the ‘permitted uses’, will fall into this category.) On the other hand, if the giving of consent would substantially increase the risk of enfranchisement, the refusal of consent may be reasonable because of the threat suddenly posed to the landlord’s reversionary interest and its value.
A landlord should therefore take care, both at the initial drafting stage of a lease and when the question of any dealing or of any application for consent arises in respect of any demise in the building or estate. It should consider the extent to which it is exposed to the risk of enfranchisement. For example, how wide is the definition of the use of the property; to what extent can user be changed without landlord’s consent; what is the scope for a tenant to apply for planning permission? It may be possible, in many circumstances, for landlords to avoid questions as to reasonableness of refusal arising by ensuring that leases are drafted as narrowly as possible in the first instance.
Parties should also note that a court’s determination as to whether a refusal is reasonable is measured as at the date consent was sought, and not by reference to what the parties contemplated at the date the lease was granted. Landlords and tenants should therefore take care to effectively document the reason[s] for the refusal and communicate their intentions and reasons clearly at the time of the decision. That information could constitute essential evidence in any subsequent litigation.
What happened in the case?
The tenant made an application for planning permission to change the use of the third and fourth floors of a mixed use property from retail to residential. The landlord refused consent on the basis that this would substantially increase the risk that the tenant could compulsorily acquire the freehold reversion.
The County Court and Court of Appeal ruled that consent had been refused unreasonably on the grounds that the landlord was trying to achieve a collateral purpose. The lease permitted residential use and the landlord was attempting to obtain a collateral advantage by refusing consent to apply for the requisite planning permission. The Court of Appeal also noted that even if there was an increased risk of enfranchisement as a consequence of consent, a third party could easily make the planning application in any event. The risk to the landlord would not, therefore, be sufficiently increased by the granting of consent.
However, by a 3-2 majority, the Supreme Court allowed the landlord’s appeal. Lord Briggs, who gave the main judgment, reasoned:
- the court should not approach ‘reasonableness’ doctrinally or rigidly
- the court should not limit the landlord’s ability to refuse consent “under the guise of construing the words”
- the right approach is to decide whether the landlord’s reason for refusal, at the time the decision was made, was sufficiently connected with the landlord and tenant relationship
- the real issue in this case was whether granting consent would result in a significant increase in the risk of enfranchisement with consequential damage to the reversion (and it would not).
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[1] [2019] UKSC 47
[2] the lease permitted a wide range of uses, but also included an obligation on the tenant to obtain landlord’s consent to apply for planning permission for change of use to a permitted user
[3] that is, a tenant’s compulsory acquisition of the freehold under the Leasehold Reform Act 1967

Schemes of arrangement: Protecting the proprietary interest
The High Court has considered whether schemes of arrangement should only affect the creditor/debtor relationship […]
The High Court has considered whether schemes of arrangement should only affect the creditor/debtor relationship or whether they can impact the proprietary interests of any creditor landlord. Real Estate Finance and Insolvency expert Austin Judson explains Re Instant Cash Loans and its practical implications.
Why is Re Instant Cash Loans of interest?
Economic uncertainty or decline inevitably results in some businesses looking to insolvency options as a means of minimising or avoiding financial liabilities. Ongoing rental obligations can be a significant commitment, leading some tenants suffering financial difficulties to negotiate schemes of arrangement which compromise their liabilities.
In the current market, with tenant insolvencies on the rise, any clarification from the courts as to how schemes of arrangement should operate will be of interest and assistance to landlords, tenants, managing agents and insolvency practitioners alike.
In the recent case of Re Instant Cash Loans Limited [1], the High Court considered whether schemes of arrangement should only affect the creditor/debtor relationship, or whether they can impact the proprietary interests of any creditor landlord. The court decided that it should not sanction a scheme which purported to surrender leases, and thereby to terminate the proprietary interests of creditor landlords.
What are the practical implications?
The case provides helpful guidance as to how schemes can be structured to give effect to compromise arrangements agreed between debtor tenants and creditor landlords.
It is important to note that the court raised the issue of the proprietary interests of the creditors itself, despite the fact that the parties had agreed an arrangement. Debtor tenants, creditor landlords and their respective professional advisers should not, therefore, assume that the court’s approval of any scheme of arrangement will be a rubber-stamping exercise. Rather, parties should expect the court to take a proactive approach to ensuring both that particular parties’ interests are protected, and that applicable legal principles are upheld.
Re Instant Cash Loans confirms that a creditor (such as a landlord) must have the choice to determine a proprietary interest (such as a lease) separately from the contractual compromises made in a CVA or other scheme of arrangement. Parties should endeavour to structure any arrangement accordingly, meaning that, even if there is little merit in keeping a lease where there is no financial benefit in doing so, surrenders must be dealt with independently from the scheme of arrangement.
Case and commercial context
Instant Cash Loans Limited, a payday loan company, ceased trading and proposed a scheme of arrangement with its creditors before looking to close down the company.
The proposed scheme included a provision to replace the company’s future rental liability with a right to damages for the creditor landlords. The scheme also included an ancillary provision under which the company’s interest and rights in each premises would be surrendered to and accepted by the relevant landlords.
Despite the majority of creditors voting in favour of the scheme, the court raised the issue of whether the termination of proprietary rights should be sanctioned in a document which otherwise governs the contractual compromises made between the debtor company and its creditors. That raised the issue of the distinction between contractual and proprietary rights. The court confirmed that the surrender of a lease should not be considered merely the by-product of the compromised contractual rights detailed in the scheme of arrangement. Notwithstanding the company’s argument that a lease is first and foremost a contractual document, the court confirmed that a lease creates proprietary rights. A lease is much more than a contractual right – it is an estate in land which can be bought and sold and which survives changes in ownership of any superior interests in the land. To require the surrender of leases would directly impact, and fundamentally change, the nature of the proprietary interest, as possession would revert to the landlord.
The court noted that the Court of Appeal had held previously that a scheme of arrangement can only affect the rights of creditors – not proprietary rights they may enjoy in their capacity as landlords [2]. Case law has also established that, whilst proprietary rights may be limited by such a scheme, they cannot be extinguished [3]. The compromise of future rent is therefore acceptable within a scheme of arrangement as it relates to the creditor debtor relationship. However surrender provisions would not be a necessary component of the scheme and should not be sanctioned. (The compromise of rental liability in exchange for damages had already been achieved by the parties in their capacities as creditor and debtor.)
The High Court therefore sanctioned the scheme of arrangement subject to the removal of the lease surrender provisions and left it to the landlords to decide, outside of the confines of the arrangement, whether to agree to a surrender of the lease.
[1] [2019] EWHC 2795 (Ch)
[2] Re Lehman Brothers International (Europe) (In Administration) [2009] EWCA Civ 1161
[3] Discovery (Northampton) Ltd v Debenhams Retail Ltd [2019] EWHC 2441