Corporate Insolvency and Leasehold Property – Court Guidance

What happens to a company’s leasehold property interests if it becomes insolvent? In an important case, the High Court has tackled that issue in relation to a troubled restaurant chain and one of its flagship branches in Central London.

The company which ran the chain had gone into administration with an expected deficit of about £11 million. It held a 25-year lease on the branch which had 16 years left to run. The landlords wished to forfeit the lease and demise the premises to a new tenant at a substantially higher rent.

That was resisted by the administrators, who were under a duty to achieve the best possible outcome for the company’s creditors. It was submitted that assignment of the existing lease would yield a substantial premium and that its forfeiture would create an unwarranted windfall for the landlords.

Ruling in the landlords favour, the Court found that the purpose of the administration would not be impeded by forfeiture of the lease. Although the administrators hoped to obtain about £650,000 on an assignment, the Court found that such value was likely to be illusory in view of the landlords proprietary rights, including the right to refuse a seating licence to any assignee.

The rent payable under the existing lease was lower than the market rent and the landlords would suffer financial loss if prevented from taking up advantageous offers from prospective new tenants. The balance thus came down in favour of forfeiture and the landlords were entitled to exercise their right of peaceful re-entry.