Landlord and Tenant Problems in the Recession
by
James Davies
Voluntary Arrangements
Voluntary Arrangements be a Company Voluntary Arrangement under Part 1 of the Insolvency Act (“the Act”) or an Individual Voluntary Arrangements under Part VIII.
In general terms there are two potential ways it can affect the landlord. Firstly in relation to liabilities under the lease itself:
- Rent arrears as at the date of creditors’ meeting;
- Future rent liability;
- Other lease liabilities such as dilapidations;
- Third party liabilities (guarantors, original tenants)
Secondly in relation to the landlord’s right to forfeit the lease and bring it to an end.
Until the creditors’ meeting a landlord is free to act as it thinks fit. The only exception to this is if there is a moratorium in place (Section 1A for a CVA and Sections 252 to 254 for an IVA). In those instances the landlord is unable to commence proceedings or peaceably re-enter.
Rent Arrears at date of meeting
“There is no doubt that the rent, which accrued due but was not paid, before the CVA was proposed in this case would be expected to be caught at least in its capacity as a debt within the CVA.”
Thomas v Ken Thomas Ltd [2007] BLR 429, per Neuberger LJ
For the purposes of the VA a past debt in respect of rent arrears is regarded as any another debt of the VA.
Future Rent
A landlord entitled to future rent is creditor for the purposes of a VA (Re Cancol Ltd [1996] 1 All ER 37. It therefore follows that a VA can bind a landlord and preclude him from recovering some or all of the rent.
However, in order to do so the wording of the VA must expressly bind future rents on a strict construction of the agreement (Burford Midland Properties Ltd v Marley Extrusions Ltd [1994] BCC 604). The case also made clear that there was a difference between a debt that would not be payable until some future transaction which could not come under the agreement and a debt which would become payable because of a transaction which had already happened. If future rent liability was to be compromised the provisions also had to deal with the future obligations on landlords.
Landlord’s Options
There are two principal routes for the landlord to try and challenge a VA. As a creditor he is entitled to vote at a creditors’ meeting and he may also challenge on the grounds of unfair prejudice (Section 6 of the Act for a CVA and Section 262 for an IVA).
Creditors’ Meeting
A VA proposal has to be approved by 75% of the creditors by value (IR 1.19(1) and 5.23(1)).
A creditor may vote in respect of an unliquidated amount or any debt the value of which has not been ascertained but his debt shall be valued at £1 unless the chairman agrees to put a higher value on it (IR 1.17(3) and 5.21(3)).
Whilst this is easy to enough to apply in respect of rent arrears the situation in relation to future rents is more complicated. In the case of Doorbar v Alltime Securities Ltd [1996] 1 WLR 456 Peter Gibson LJ held that it was “wrong in principle” to treat the value of the claim as being the aggregate of the future rent due under the lease. It was reasonable for the chairman to take account of the possibility that the landlord would exercise his power of re-entry even though there is no duty on a landlord to do this to mitigate their loss. If a landlord wants to contend for a higher voting value then they will have to produce evidence in support.
In Re Newlands (Seaford) Educational Trust [2006] 2 EGLR 7 a landlord produced limited evidence from a surveyor in support of a debt put at 2 years future rent and dilapidations of £875,000. The Chairman, nonetheless, ascribed a value of £1 to the claim. Sir Andrew Morritt C held:
“...it may well be that the minimum value of the landlord’s claim is greater than the sum of £1 attributed to it by r 1.17(3) but I do not see any basis on which the chairman could have put any higher value on it”
Evidence has to be specific and capable of justifying the figure claimed. If not, a chairman will be entitled to take the view to assign a nominal value to the debt.
Unfair prejudice
Arrangements are very flexible. The greatest risk of unfair prejudice is in relation to how it is proposed the landlord and tenant relationship will proceed going forwards. There may be attempts to imposed a reduced rent on the landlord or require surrender of leases. The problem of surrender is particularly acute as unlike disclaimer by a liquidator, where claims against third parties such as guarantors are expressly preserved, in the case of surrender the lease brings the obligation which has been guaranteed to an end and discharges the guarantor.
The situation in relation to rent going forward was considered by the Court of Appeal in Thomas v Ken Thomas Ltd. Neuberger LJ (as he then was) put it in these terms:
“If the tenant is to continue occupying the landlord’s property for the purposes of trading and the CVA. He should normally, as it currently appears to me, expect to pay the full rent to which the landlord is contractually entitled”
In other words the VA should not operate to benefit of other creditors and the detriment of the landlord.
The case of Prudential Assurance Co Ltd v PRG Powerhouse Ltd [2008] 1 BCLC 289 involved a large number of high street and superstore retail premises. The proposal approved at the creditors’ meeting involved compromising the rights of landlords of stores scheduled for closure such that they would receive a dividend but not be permitted to pursue against guarantors. The CVA was set aside.
The fact that different creditors were to be treated differently did not necessarily mean that the arrangement was unfair. However, the proposed CVA was unfairly prejudicial as it left the guaranteed landlords without the benefits of the guarantees and in a substantially worse position than they would have been in if the tenant had gone into liquidation. It was also set aside on the basis that the majority of creditors approving the proposal were in fact going to be unaffected by it.
Be warned: The challenge to the VA must be brought within 28 days of the report to the court of the outcome of the meeting. There is no power to extend this time limit no matter how prejudicial the arrangement.
Forfeiture
Voluntary Arrangements
The arrangement can reduce the past rent arrears and the arrangement can also limit the future rent due under the lease.
The consequence of either of these options is that the tenant can avoid forfeiture by paying the rent fixed under the VA rather than under the lease but the right to forfeit as such is not lost (Thomas v Ken Thomas Ltd).
Administration
On entering administration Schedule B1 paragraph 43 of the Act is brought into play. Sub-paragraph (4) prevents peaceable re-entry and (6) prevents the commencement of proceedings (and therefore re-entry by service of proceedings) in both cases without the consent of the administrator or permission of the Court.
These provisions are of considerable importance as unlike with liquidation there is no power for an administrator to disclaim the lease. An administrator may be prepared to consent or to negotiate a surrender. If an application to the Court becomes necessary then a number of guidelines were set out in the case of Re Atlantic Computer Systems plc [1992] Ch 505:
- A landlord should ordinarily be granted permission to exercise its right of forfeiture unless the premises are required by the tenant company in order to facilitate that administration. The burden of proof on such an application is on the landlord.
- If the landlord is not given permission to forfeit the lease then the court can, and in most cases should, require the administrators to meet the rent that has fallen during the administration as a condition of any refusal of permission.
- An administration should not be conducted for the benefit of the unsecured creditors at the expense of creditors with proprietary rights.
- One way of balancing the landlord’s rights against the legitimate needs of other creditors is to measure the damage which would be caused to the landlord by refusing permission as against that to be suffered by unsecured creditors if it were granted.
A more recent application of these principles was in Metro Nominees (Wandsworth) (No 1 ) v K Rayment [2008] BCC 40. The administrators sold the business and assets on to a Phoenix Company. The Phoenix Company was allowed into occupation without consulting the landlord who then refused permission to assign on the basis of the Phoenix Company’s lack of financial standing. The landlord sought to forfeit the lease and the administrators claimed that they continued to require the premises for the purposes of the administration.
Mr Justice Norris held that the sale of the business had already taken place. The assignment would only benefit the Phoenix Company. The company in administration no longer required the premises. Allowing the landlord to forfeit would accordingly not impede the objectives of the administration.
Compulsory Liquidation
Until the winding-up order is made there is no restriction on a landlord exercising a right of re-entry between presentation of a petition and the making of a winding-up order. On the making of the winding-up order Section 130(2) comes into effect:
“...no action or proceedings shall be proceeded with or commenced against the company or its property except by leave of the Court and subject to such terms as the Court may impose”
Action or proceedings would appear to cover re-entry by proceedings but it is less clear how they relate to peaceable re-entry. The case of Herbert Berry Associates Ltd v IRC [1977] 1 WLR 1437 held that distress was caught under a similarly worded provision in the Companies Act 1948. It is therefore arguable that peaceable re-entry would also be caught.
The application for permission must be made in the insolvency proceedings not in possession proceedings. The court does not go into a detailed investigation of the merits or evidence but will do what is right and fair in all the circumstances New Cap Reinsurance Corp Ltd v HIH Casualty & General Insurance Ltd [2002] EWCA Civ 300.
Bankruptcy
The position in relation to personal insolvency is somewhat different.
Section 285(3) of the Insolvency Act 1986 provides:
“... No person who is a creditor of the bankrupt in respect of the debt provable in the bankruptcy shall:
(a) have any remedy against the property or person of the bankrupt in respect of that debt; or
(b) Before the discharge of the bankruptcy commence any action or other legal proceedings against the bankrupt except with leave of the court and on such terms as the court may impose”
On bankruptcy the lease becomes vested in the trustee. It is no longer the property of the bankrupt. Further forfeiture is not a remedy used in respect of a debt. It is a remedy to terminate the lease and recover the landlord’s own property (Ezekiel v Orakpo [1977] QB 260)
James Davies
Email: james.davies@3pb.co.uk
Telephone: + 44 (0) 1865 793736
James Davies
Profile
James Davies practices across a broad range of property and chancery work with experience of advisory work, drafting and advocacy. His practice includes litigation arising out of conveyancing, both in its own right and through professional negligence claims against solicitors. He has a particular interest in landlord and tenant law and has lectured on the subject at Oxford Brookes University.
Recent work has included:
- Successfully representing a vendor in defending a claim for the return of a deposit in a conveyancing transaction where the vendor’s notice to complete was defective;
- Advising and drafting a Counterclaim in a neighbour dispute where the client was being subjected to CCTV surveillance;
- Representing the successful claimant in a week long trial concerning whether a sitting tenant was protected under the 1954 Act and the Standard Conditions of Sale. The claimant had purchased the property having been advised it was a residential tenant. The claim was brought against both the tenant and the vendor and succeeded against both;
- Representing at trial a tenant in a commercial service charge dispute resulting in a substantial reduction in the service charge sought;
- Applying in the Companies Court for permission to continue forfeiture proceedings against a company in liquidation;
- Representing the Trustee in Bankruptcy on a successful appeal from the County Court to the High Court. The appeal, before Mr Justice Henderson, considered the important questions as to the meaning of the “needs” of the bankrupt in Section 335A of the Insolvency Act 1986 along with the issue of whether a Court was entitled to consider the circumstances of the making of the original bankruptcy order on an application for an order for sale. The case is reported as Everitt v Budhram [2010] Ch 170
Publications
Showing good cause – Leases and the costs of proceedings [2010] NLJ 13
Betterment - For better or worse? [2010] NLJ 1635