Insolvency Implications For Commercial Leases

Author:Ms Sarah O'Mahony
Profession:Arthur Cox
 
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It is symptomatic of the current financial climate that we are frequently asked to advise on a landlord's remedies against the corporate tenant of an occupational lease in circumstances of the latter's insolvency. The various categories of corporate insolvency and the landlord's position are considered below:

Liquidation

The landlord's position vis-à-vis rental payments due to him pursuant to the lease (including rent, service charge and other payments expressed as being payable to the landlord thereunder) differs depending on whether the same accrued prior to the commencement of the liquidation (in respect of which the landlord ranks as an unsecured creditor), or subsequent to the commencement of the liquidation. In respect of the latter, if the liquidator elects to occupy the property (which is typically done in consultation with he landlord for an agreed period) and where the property is used for the benefit of the liquidation and is necessary for the winding up, then the rent and other expenses are deemed an expense of the liquidation.1

Notwithstanding the express terms of a comprehensively worded forfeiture clause, a landlord cannot forfeit a lease for the fact of the insolvency until twelve months have expired since the commencing of the liquidation. This protection does not extend to the landlord's entitlement to forfeit for non-payment of rent, which is unaffected (although a liquidator, like a tenant, will enjoy an equitable right to apply to court for relief against forfeiture for non-payment of rent). The liquidator will also enjoy certain statutory protections which are afforded to tenants, and which require a landlord to serve a notice of non-financial breach of covenant upon the tenant, which specifies the relevant breach of covenant and requires to be remedied.

If a liquidator has no use for the property, he will seek to negotiate a surrender of the lease to the landlord. If the landlord does not accept the lease, the liquidator has the option to go to court to disclaim an 'onerous' lease, at any time within the 12 month period commencing on the liquidation2. An onerous lease is described as any lease which constitutes a liability to the holder (so it is safe to assume that most commercial occupational leases would be deemed to be onerous for the purposes of this test).

This can leave the landlord in a situation where he is in a position of uncertainty for a prolonged period of time. If negotiations are not advancing...

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