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Property Litigation Bulletin
If you are the landlord and your tenant, being a company, is put into liquidation or, being an individual, becomes bankrupt, there is a power in the Liquidator or Trustee in Bankruptcy to disclaim the Lease. That will bring the Lease to an end.
Note that this power is only available to Trustees in Bankruptcy and Liquidators, not, for example, to Administrators or Law of Property Act Receivers.
The principle behind it is that a Liquidator or Trustee in Bankruptcy should be able on behalf of the estate of the bankrupt entity to disclaim any onerous contract or obligation which would otherwise burden the estate. If it was felt that a Lease was onerous then that is something which could come within this principle.
However, it is by no means automatic that a Trustee or Liquidator will disclaim a Lease. There may be value in it. The property may be necessary for the Trustee or Receiver to retain for the purpose of carrying on the business.
A landlord is able to force the issue by serving notice which requires a decision within 28 days. If the Liquidator or Trustee decides to disclaim he must do so within that period otherwise he cannot.
It is assumed (but it has not been established definitely) that if the Trustee or Liquidator chooses not to disclaim that will make the rent going forward part of the expense of the liquidation and therefore have priority over creditors. However, that is by no means established.
If the Lease is disclaimed it comes to an end, but subject to the rights of any other person interested in the Lease to apply to the Court for the appropriate relief. For example, a sub-tenant may apply to have the Lease effectively transferred to him.
Note, however, that if there were an agreed surrender between the landlord and the Trustee, then that would not terminate the Sub-Lease so if the landlord wants to retain a good sub-lessee the best way of dealing with that is to agree a surrender.
There is often a Guarantor of the original lessee. Until relatively recently the law (strangely enough) was that on the disclaimer of a Lease the Guarantor would be released from his obligations. However, that rather absurd position was reversed by the House of Lords and it is now clear that a disclaimer does not affect the liability of a Guarantor. Often the guarantee clause obliges the Guarantor to take a new Lease or to take an assignment of the Lease in the event that the original tenant becomes insolvent.
Note that any arrears of rent as at the date of bankruptcy or liquidation would be claimed against the estate as a creditor in the usual way.
It is worth remembering that disclaimer only applies to bankruptcy or liquidation so any other form of dealing with insolvency will not give the tenant a way out of the Lease. Of course in all forms of insolvency, subject to the wording of the Lease, the landlord may have the right to forfeit and thereby bring the Lease to an end if he chooses. There are however certain restrictions applying, depending on the kind of insolvency which are beyond the scope of this “in brief”.
FROM OUR PROPERTY LITIGATION TEAM:
Alan Langleben, Philippa Dolan
David Liebeck, Paul Dunbar,
Laura Sterling
Issue 26 – May 2009
If you require advice or assistance on the contents of this briefing please contact Alan Langleben or Paul Dunbar on 020 7544 2424
The information and any commentary on the law contained in this “In Brief” is provided free of charge for information purposes only. No responsibility for its accuracy or correctness, or for any consequences of relying on it, is assumed by Rochman Landau. This “In Brief” does not amount to legal advice and is not intended to be relied upon. You are strongly advised to obtain specific, personal advice from a solicitor about your case.