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Unlawful assignment and forfeiture – no free pass for administrators

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21/01/2016

Tenant insolvency

In Re SSRL Realisations Ltd (In Admin); Lazari Investments v Saville [1], Signature and Strada Restaurants Ltd t/a Strada (SSRL) was the tenant of a unit in a shopping centre. Administrators were appointed over SSRL in September 2014.

The administrators proposed to (and subsequently did) assign the lease for a premium as part of a pre-pack sale to Strada Trading Limited. The administrators allowed the proposed assignee into occupation of the premises pursuant to a licence, pending consent from the landlord to the assignment. This licence was (as is typical in such cases) in breach of the terms of the lease.

To the public, there was no change – the assignee continued to trade as Strada. From the landlord’s perspective, however, there was now an insolvent tenant and a newly incorporated company in occupation of the premises without consent.

The landlord objected to the proposed assignment on the basis that the assignee was a ‘newco’ and no authorised guarantee agreement (AGA) [2] was offered to guarantee the payment of rent. The lease contained various conditions upon which the landlord could  insist before granting consent to an assignment, none of which were initially offered. Even when the administrators later offered a 6 months’ rent deposit and a parent company guarantee, still the requirements of the lease were not met.

The landlord therefore served notice [3] in December 2014 to forfeit the lease due to the tenant’s insolvency and the unauthorised occupation.  The landlord then applied to court to terminate the lease and recover possession.

Decision

The High Court considered that the purpose of the administration would not be impeded by allowing the landlord to pursue its proprietary rights, and thereby to recover possession. The administrators had sought to argue that they would be able to achieve a premium by assigning the lease but, whilst the lease did have some potential premium value, the court concluded that the administrators were unable to unlock any of that value due to the landlord’s lawful exercise of its rights [4].

The court therefore granted the landlord permission to forfeit the lease and found that the landlord had not unreasonably withheld consent to assign. Helpfully, the landlord was also able to show that it had alternative tenants willing to take the property.

The Court of Appeal dismissed the administrators’ application for permission to appeal in December 2015.

WM Comment

This case reiterates that careful consideration must always be given to the terms of the lease, in particular the alienation provisions. Landlords will be heartened to note the High Court’s confirmation that this is so even in the context of administrations, where financial prejudice suffered by administrators may not necessarily be enough to prevent forfeiture.

Another practical point to note is that, in SSRL Realisations, the administrators had delayed in taking action in relation to the events surrounding the forfeiture. Administration is intended to be a temporary regime and that delay ultimately counted against the administrators when they then sought assistance from the court.

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[1] Re SSRL Realisations Ltd (In Administration); Lazari Investments Ltd v Saville & Ors [2015] EWHC 2590 (Ch)
[2] made pursuant to section 16 (2) of the Landlord and Tenant (Covenants) Act 1995
[3] in accordance with Section 146 of the Law of Property Act 1925
[4] As well as lawfully being able to require an AGA, the landlord was lawfully able to refuse an outdoor seating licence.  Both of these impacted upon the potential ‘premium’ value.