Landlords be wary of insolvent tenants

Published: 19th November 2008

Innovate Logistics Limited v Sunberry Properties Limited

On 18 November 2008 the Court of Appeal gave a judgment in a case that will have a bearing on any Landlord seeking to recover property which was previously leased to a company which has gone into administration.

Landlords will be familiar with the fact that the administration of a tenant gives rise to a moratorium preventing a Landlord from taking any steps to either forfeit the tenant's lease or to distrain for unpaid rent without either the consent of the administrator or the permission of the court.

In the case of Innovate Logistics Limited -v- Sunberry Properties Limited the Court of Appeal has given guidelines as to how the lower courts should approach applications from landlords for permission to forfeit.

This case involved a tenant who occupied premises used to store customers' goods pending distribution in frozen and chilled conditions. The tenant went into administration and on the same day the administrators entered into a sale agreement with X Limited for the sale of the tenant's business at the property as a going concern.

The sale was on terms that purported to grant an occupational licence or lease of the property to X Limited for six months with monthly payments equal to one month's passing rent under the lease. The administrators agreed to pass on to the Landlord the sums paid by X Limited in respect of its occupation of the property. The Landlord wanted X Limited to take an assignment of the lease but X Limited was not minded to do so because it only required the premises for a limited time.

The Landlord applied for permission to bring proceedings against the tenant and X Limited alleging that the licence was in breach of the lease covenant preventing assignment. They sought an order for the administrators to terminate the licence that had been granted to X Limited. The tenant (through the administrators) argued that the order sought by the Landlord would impede the purpose of the administration because in order to get back certain book debts owed to the tenant, it was necessary for X Limited to occupy the property and take over and perform the tenant's contracts. The court at first instance allowed the Landlord's application and the tenant appealed.

The Court of Appeal allowed the appeal effectively agreeing with the tenant's assertion. It held that the judge at first instance had been wrong to conclude that the purpose of the administration would not be impeded by the commencement of proceedings by the Landlord and that the judge had failed to appreciate that one of the main purposes of the administration was a continuation of the collection of book debts for the benefit of the tenant's creditors.

The Court of Appeal stated that the judge ought to have carried out a proper balancing exercise between the legitimate interests of the Landlord to recover its property as against those of the tenant's other creditors as per the guidelines in the 1992 case of Re Atlantic Computer Systems Plc. Since the landlord would be receiving the monthly rental from X Limited it was in no worse position other than the fact that the rent was payable monthly rather than quarterly.

Finally the Court of Appeal declined to order the administrators themselves to pay to the Landlord the full contractual rent as set out in the lease apportioned from the start of the administration to the date when X Limited eventually vacated the premises.

This case shows that the factors which the court can take into account when exercising its discretion are wide. It will not make for comfortable reading for Landlords faced with the prospect of receiving ongoing rent from a successor company which may be of questionable financial strength. It has been noticed recently that administrators are often trying to negotiate downwards the amount of rent they are prepared to offer Landlords who find themselves in this position. Landlords are advised to take early legal advice in cases of tenant insolvency in order to fully maximise their prospects of recovering property or receiving ongoing rent.