Leases With Value

Leases should only be dealt with by a case clerk in close consultation with the examiner.

September 2007

Introduction

1. What is a lease?

Generally, a lease may be defined as a letting of land by one person (the lessor), who retains the freehold interest in the land, to another (the lessee) for either a fixed term of years or life, usually on payment of an initial lump sum premium and the continued payment of a rent which may be reviewed at set intervals.

Basically, the difference between a lease and most forms of tenancy is that a tenancy grants to the tenant a right of occupation usually for a fixed period, whereas a lease gives to the lessee an interest in the property which is enforceable at law, so that if the lessor dies or disposes of the freehold interest in the property, the leaseholder will retain his/her interest in the property.  

 

2. Domestic leasehold property

It is not unusual to find a bankrupt residing in leasehold premises as the majority of flats and maisonettes and even some houses are occupied under lease rather than freehold, the usual term of such a lease being either 99 or 999 years. However, as in most cases, the bankrupt will have had to borrow the money to buy the leasehold property and his/her interest in the property is likely to be subject to a charge such as a mortgage.

For the purposes of realisation, leasehold property can be treated in a similar way to a freehold property. Enquiries should be made of the mortgagee(s)/charge-holder(s) regarding the debt(s) due under any charge(s). If the property is of sufficient value to realise a benefit to the estate, steps should be taken to realise the leasehold. Where the property is jointly owned and the net equity is small, the official receiver, when trustee, may consider disposing of the bankrupt’s interest to the joint owner for a minimal sum. Otherwise, the matter can be passed to the RTLU until such time as the property acquires a value sufficient to justify realisation.

However, when determining and dealing with a bankrupt's interest in a dwelling-house which is the sole or principal residence of either the bankrupt, the bankrupt's spouse or former spouse, the guidance given in Technical Manual Chapter 31.3, Part 3 and Case Help Manual part : Family Home should be followed.

For further information on the sale of the bankrupt’s interest to the joint owner see Case Help Manual part: Sale of bankrupt’s interest in jointly-owned property

 

3. Commercial leasehold premises   

The area of commercial leases is not always straightforward and should be a matter for referral to the examiner. In fact, most commercial leases do not provide any benefit to the estate and many will be forfeited under the terms of the lease once the insolvency order has been made but occasionally, the official receiver will have to deal with a commercial lease that has a net realisable value which means that it must be disposed of.

 

4.  Forfeiture Clauses

In law, a landlord will usually ensure that he/she keeps the right to take back or forfeit a lease where any covenant contained within the lease has been breached by the lessee. (A covenant is a clause contained within a written agreement, whereby one party to the agreement binds him/herself to either doing or not doing something for the other person.)

In the case of commercial leases, it is fairly common practice to include a forfeiture clause relating to insolvency so that once the lessee becomes bankrupt or goes into liquidation, the landlord has the right to re-enter the premises and do with it as he/she wishes, including, subsequently, the creation of a new lease.

Sometimes, the official receiver can apply to the court for an order that a forfeiture clause be treated as invalid but where the clause is an insolvency proviso, no relief will usually be available. Therefore, if the lease contains an insolvency forfeiture clause, there is nothing that the official receiver can do to prevent the landlord taking the property back should he/she choose to do so. The file and LOIS (CA08/15) should be noted accordingly.

For further information see Technical Manual Chapter 31.3 paragraphs 31.3.363 to 31.3.367.

 

5. General procedure for dealing with leases

(Amended January 2011)

The official receiver will normally become aware that there is a lease in a case at the initial enquiries stage. It is very important that a copy of the lease is obtained as quickly as possible. In the first instance, the bankrupt or director is obliged to provide a copy of the lease to the official receiver.

The landlord should be informed of the insolvency using Form NTL. This letter asks for a copy of the lease together with details of any rent arrears (although where the lease is already in the official receiver’s possession, this requirement should be deleted from the letter). The official receiver does not need to send the NTL where he/she is satisfied that the tenancy is an AST or otherwise exempt (i.e. local authority or registered social landlord tenancies) and that the landlord is not a creditor of the bankruptcy estate.  In all other cases the NTL should be sent.

It is imperative that once a reply is received from the landlord, it is referred to the examiner for further instructions.

In the case of leasehold residential premises, the official receiver should also make the necessary enquiries of any mortgagees or charge-holders using form MP2 (Mortgaged Property 2). The form asks the mortgagee for details of the outstanding debt(s), the insurance status of the property and the purchase price of the property. On receipt of reply issue form MP3, if appropriate,  which asks the mortgagee to note the official receiver’s interest in a property which forms part of the bankruptcy estate.

 

6. Valuation of leases  

Where a domestic leasehold property is to be sold the official receiver should generally obtain a valuation of the property unless he/she is satisfied that a recent independent valuation is accurate.

Using agents to value commercial leases may be necessary in some instances. However, examiners, assistant official receivers or official receivers who have experience of dealing with leases may be able to assess whether a lease has any value. The official receiver should determine:

  • Whether any premium was paid for the lease and if so, how much?
  • Whether it is a full repairing lease and what state of repair the building is in,
  • The period of lease remaining,
  • When the next rent review is due,
  • The level of any rent arrears,
  • Whether the insolvent has made any improvements to the building.

If there is any uncertainty concerning the value of the lease, the official receiver should obtain a professional valuation. However, if after considering his/her experience in dealing with leases, the type of lease, business involved and the area that the building is in, the official receiver is satisfied that there is unlikely to be any value to the estate in the lease then it should be disclaimed which will discharge him/her of all personal liability in respect of the lease.

For further information see Case Help Manual parts: Agents and Disclaimers

 

7. Disposal of leases with minimal value

Where there is only a minimal equity and the official receiver is the liquidator or trustee, he/she should endeavour to sell the insolvent’s interest for a nominal consideration . Please note however, that any action taken by the official receiver to sell an interest in leasehold property may give rise to a liability for rent and other expenses. Therefore the potential liability for rent and the other dues must be taken into account when deciding if it is beneficial to the estate to sell the interest in such property and before any action is taken to sell it. The official receiver should always instruct solicitors to act on his behalf in the sale of a lease.

 

8. How does the official receiver dispose of a lease with value?

Where there is equity for the benefit of the insolvent’s estate and the property is to be sold, a solicitor should be employed to act for the official receiver. In all cases the legal costs and those of any valuation obtained by the official receiver should be covered by the sale proceeds or be paid by the proposed purchaser i.e. there should be a net benefit from the sale to the insolvent estate. In the latter case the appropriate funds should be obtained from the purchaser before instructions are given to solicitors. The money should be held in a suspense account and purchasers should be informed that the funds will not earn interest. A debit balance must not be incurred for the official receiver’s legal costs without the prior sanction of Technical Section.

There are additional matters to be considered when leasehold property is sold and guidance is given in Technical Manual Chapter 31.3, Part 13.

 

9. When should a lease be surrendered?

Sometimes, in a company case the official receiver may be able to negotiate the formal surrender of a lease with the landlord. This action should not be considered at all in a bankruptcy case where disclaimer is a much more suitable option and should only be used in exceptional circumstances in a company case.

In a company case, formal surrender is only appropriate where

  • the landlord is willing to pay a consideration for the surrender of the lease or tenancy and to pay the official receiver’s legal expenses because it is beneficial for him to end it (a surrender of a lease returns the tenant’s interest in the lease to the landlord who may then issue a fresh lease at, for example, a higher rent, etc.)
  • there is benefit to the estate in negotiating a reduction in the liabilities claimed by the landlord against the company’s estate.

In either case the official receiver should formally surrender the lease by deed which will need to be signed by him (as liquidator) as well as by the landlord. Solicitors should always be employed to prepare the deed and negotiate the terms of the surrender so that there is no doubt regarding the terms agreed.

For more detailed guidance see Technical Manual Chapter 31 paragraphs 31.3.359 to 31.3.362.

 

10. What if the insolvent is the lessor or landlord?

On occasion, the official receiver may have to deal with the leasehold of a property where the insolvent is not the lessee but the lessor i.e. where the insolvent is the landlord. This situation can be fraught with problems and the case clerk should only act on instructions once a course of action has been decided upon by the examiner. Further detailed guidance, regarding the implications of the Landlord and Tenant Act 1987 ( as amended by the Housing Act 1996), can be found in the Technical Manual Chapter 31.3, Part 7. 

 

 

Notes

a  Where there is  a Law of Property Act Receiver in office, appointed by a mortgagee/charge-holder to deal with the property on its behalf the appointment will be unaffected by the insolvency, as long as it was completed prior to the order. The official receiver will need to write to the LPA Receiver to notify him/her of the insolvency and to ask for any surplus to be held to the order of the official receiver. The LPA receiver can be left to deal with the property.

b  Where a “notice to elect” is received requiring an urgent decision regarding the official receiver’s intentions with regard to the lease, it must be passed to the examiner without delay. If they are not available it should be passed as a matter of urgency to an assistant official receiver.

 

Where can I find out more?

Technical Manual

Chapter 31.3 - Dealing with Freehold and Leasehold Properties

Chapter 31.3, Part 3  

Chapter 34  - Disclaimers

Chapter 49  - Insurance  

Case Help Manual

Agents  

Disclaimers

Family Home 

Sale of Bankrupt’s Interest in Jointly Owned Property

Forms to be used:

NTL - Notice to landlord of bankruptcy order /winding-up order

MP2 – Mortgaged Property (2)

MP3 – Mortgaged Property (3) 

 

Leases with Value Flowchart 

 

Procedure

LOIS screen references are in brackets eg (DO 73) 

1. Receive file from examiner after initial enquiries indicating that there is leasehold property in the case.

2. In the case of leasehold residential premises, notify mortgagee (s) of order on form MP2 and if appropriate issue form MP3(DO73).

3. If appropriate, in the case of a jointly owned property with little or no equity, send form MP1 - offer to purchase letter (DO73). Then follow procedure in Case Help Manual part: Sale of Bankrupt’s interest in Jointly Owned Property.

4. Where the official receiver remains trustee/liquidator and where asked to do so, prepare a disclaimer of lease referring to Case Help Manual part : Disclaimers. Note the disclaimer on LOIS (CA08/CA15).

5. Where the lease is not immediately saleable and is not suitable for disclaimer prepare the case for passing to the RTLU to monitor the realisation. Note the file and LOIS accordingly (CA08/CA15).

6. If a Notice To Elect is received, pass it to the examiner immediately for a decision as to the action to be taken. If they are not available it should be passed as a matter of urgency to an assistant official receiver.

7. In the case of commercial premises, write to the landlord to notify him of the insolvency using form NTL(DO73). If necessary, chase up a reply after 7 days. Once a reply is received, refer to the examiner for further instructions.

8. In liquidations, any charge-holders should also be notified of the winding-up order using form NORD1 which can be adapted to request details of any charge(s).

9. If considered necessary by the examiner, instruct the agents to prepare a valuation of the property. Ensure that a copy of the lease is enclosed with the letter.

10. Any correspondence referring to a surrender of the lease should be referred to the examiner.

11. Where it is decided that the lease should be sold the examiner will prepare any instructions to agents and the instructions to a solicitor to act on behalf of the official receiver.

12. Once the lease has been sold, the file and LOIS should be noted accordingly (CA08/CA15).

13. If the examiner has decided that the lease will not produce any benefit for the estate prepare and issue disclaimer.