LEASED COMMERCIAL PROPERTY
(Amended February 2014)
This Part provides advice to assist in dealing with a commercial lease held by the insolvent. Such a lease is typically for a period of no more than 25 years, and, generally, a monthly rent is paid.
Residential leasehold property would generally be characterised as being for an initial period of 99 years or more, with any rent being a ‘peppercorn’ (token) rent. Such properties can effectively be dealt with by the official receiver as freeholder, following the guidance elsewhere in this Chapter – particularly Part 5.
Guidance on property held by the bankrupt under a tenancy is covered in Part 4 of Chapter 30.
The official receiver, after disposing of a commercial lease, either by assignment or formal surrender, or disclaimer, should arrange for the cancellation of any insurance as per the advice in paragraph 49.27B. Where the lease is ended by the landlord taking action to obtain forfeiture that official receiver should cancel any insurance obtained by him/her within 5 working days.
The following factors should be taken into account when deciding whether a commercial lease has any value:
It is likely that the official receiver will need professional assistance in valuing commercial leases. Such a valuation can generally be provided by the official receiver’s usual agents.
Where the lease has value to the estate, taking into account the need to ensure that funds are available to discharge the liability for rent and any other expenses which will accrue as an expense in the insolvency (see paragraph 31.3.352), the official receiver should consider assigning the lease (subject to conditions therein – see paragraph 31.3.353).
It is likely to be necessary for the official receiver, as liquidator/trustee, to engage agents to market the lease on his/her behalf, unless there is a willing purchaser introduced by the insolvent.
Any action taken by the official receiver, as liquidator or trustee, to sell an interest in a lease may give rise to a liability for rent and other expenses relating to the property from the commencement of insolvency, as an expense of the insolvency, whether or not the sale completes [note 1] [note 2]. Therefore the potential liability for rent and other dues must be taken into account when deciding if it is beneficial to the estate to sell the interest in such property.
Before seeking to dispose of a lease, the official receiver should comply with the terms of the lease in its disposal. In particular, the official receiver should check the lease to confirm the following:
Where the official receiver accepts an offer to purchase the lease, any written acceptance (including e-mails) issued should be clearly marked ‘subject to contract’. Similarly, written communications offering an assignment should be marked ‘subject to contract’.
As outlined in paragraph 31.3.353, the official receiver should always comply with the terms of the lease in its disposal. He/she should obtain the necessary consent of the landlord before solicitors are instructed regarding the assignment.
The landlord may be unwilling to grant consent where there is a proposed change of usage of the property, the landlord does not consider that the proposed assignee will be able to pay the rent or meet other obligations in the lease, or if he/she will be seriously disadvantaged by the assignment [note 3] [note 4].
The landlord may not unreasonably withhold his/her consent to the assignment or disposal of a lease [note 5] and he/she must respond to a request for consent within a reasonable time [note 6]. These provisions apply to most leases, with certain agricultural and mining leases excepted [note 7]. The landlord may seek to levy a charge to cover the administrative costs of providing consent. These costs (if any) should be established early in discussions.
Where a lease has a saleable value and the landlord will not consent, the official receiver should seek the advice of Technical Section as it is likely that legal advice will be required.
The official receiver, through solicitors, should ensure that the purchaser of the lease covenants:
‘that he/she (the purchaser), and all his/her successors in title, will pay the rent ad observe the other covenants under the lease and will keep the official receiver/the insolvency estate indemnified against any liability arising from a breach of those covenants.’
If the insolvent is a company and was the party to whom the lease was originally granted, the official receiver’s solicitors should also obtain from the landlord a written release for the company from any liability for breaches of the terms or covenants of the lease and, failing this, should obtain indemnity insurance in case a claim is made against the estate for future rent.
The above covenant and release from liability will not be necessary if the lease was originally granted on or after 1 January 1996 [note 8], or where the insolvent is the original lessee.
The official receiver has the power, as liquidator, to convey its property [note 9]. Where the company has a company seal, it may be used when executing the conveyance, assuming it has been recovered [note 10] [note 11]. If it has not been possible to recover the seal, it is usually possible to obtain a replacement seal from a local rubber stamp manufacturer or from a company operating on the internet. The target cost for a simple hand seal should be in the region of £20.
Where the company does not have a seal, or it has not been possible to recover or obtain replacement of the seal, the official receiver is still able to execute a conveyance if, and only if, it is delivered as a deed [note 12]. Guidance on the completion of conveyance by deed is produced by the Land Registry (http://www.landregistry.gov.uk/professional/guides/practice-guide-8 - paragraph 8.5 provides guidance relating to liquidations).
A lease or tenancy may be surrendered by operation of law where the actions of both parties to the lease or tenancy make it clear that they intend the lease or tenancy to come to an end. Alternatively it may be relinquished by exchange of letters (sometimes referred to by the official receiver as an ‘informal surrender’ although in legal terms this is incorrect). Neither of these two options should be adopted by the official receiver, even with legal advice, because of the difficulties that can arise if all relevant matters (not just the liability for future rent) are not resolved prior to the ending of the lease or tenancy.
Instead, the official receiver should issue a disclaimer (see paragraph 31.3.368) even when the landlord is prepared to accept possession by way of an informal surrender of premises. A disclaimer will result in a ‘clean-break’ of the estate’s interest in the property and will avoid any future problems in relation to contingent liabilities.
A ‘formal’ surrender of a lease is achieved by the parties to the lease negotiating terms to end the lease. Such a surrender may be beneficial to a landlord where it would put him/her in the position that he/she could then issue a fresh lease.
Normally, a disclaimer would be the appropriate way to bring to an end an interest in a lease that cannot be sold (assigned – see paragraph 31.3.353), but a formal surrender may be beneficial to the estate where:
A surrender of a lease should be by deed, signed by the official receiver, as liquidator or trustee, and also by the landlord.
The official receiver should engage solicitors (see paragraph 32.2.1) to negotiate the terms of the surrender and to draft the deed, ensuring that sufficient funds are made available by the landlord to pay the solicitors’ costs.
Where the company or bankrupt has sub-let a leased property (and is therefore a landlord as well as a tenant), reference should be made to Part 7 as the surrender may be a disposal for which the tenant has a right of first refusal.
Forfeiture of a lease may occur where the terms of the lease have not been complied with, resulting in the loss or compulsory transfer of the lease to another.
The landlord’s right to forfeit will be written into the lease, which may entitle the landlord to end the lease upon breach of a covenant or terms of the lease by the tenant. A lease may give the landlord a right of re-entry or forfeiture where the tenant/lessee has failed to pay charges which are properly due under the lease, or on the making of an insolvency order [note 13].
To exercise the right of forfeiture (see paragraph 31.3.363) following failure to pay charges, the landlord must meet all the legal requirements and obtain a court order. A court order will only be granted if the tenant/lessee has admitted they are liable to pay the amount, or it is determined by the court, a tribunal or by arbitration that the amount is due.
Before serving notice for forfeiture for rent arrears, the landlord may have to serve a formal demand or levy distress (see Chapter 9, Part 4).
For breach of any other covenant, the landlord must serve notice specifying the breach, requiring it to be remedied if possible, and requiring compensation. Only if the lessee/tenant fails to comply with that notice within a reasonable time can the landlord enforce his/her right of re-entry.
Where the official receiver is aware that the landlord has served notice to re-enter the property or forfeit the lease (see paragraph 31.3.364), and the lease is of value to the estate, he/she should consider applying to court for relief from forfeiture [note 14], which is available within one year of the insolvency order. Before doing so, the official receiver will require sanction (see Chapter 29).
If the sole reason for forfeiture is non-payment of rent, the court will usually require that the arrears are paid before granting relief.
Relief from forfeiture is not available for certain types of occupation including furnished residential dwellings, public houses and agricultural land [note 15].
Leave of court will be necessary before a landlord can enforce his/her right to forfeiture [note 16], notifying the official receiver, as liquidator, of the proceedings. Where the official receiver is aware of the identity of any mortgagees, he/she should advise them of the proceedings, as a matter of courtesy.
Provided that the lease is of no value to the liquidation estate, the official receiver should not object to the application for leave, but he/she should attend the hearing(s). This is important because monetary judgment may be entered against the company – in which case the official receiver should seek an undertaking that the order will not be enforced against the company without leave of court.
If a landlord wishes to take action to forfeit a lease after the bankruptcy order, leave of court will usually be required. This is because forfeiture is deemed to be a remedy to determine the lease and not to enforce payment of the rent [note 17] [note 18].
Leave of court is also required to enforce re-entry where the tenant has made a claim to acquire the freehold [note 19], or is participating in a claim to exercise a right of collective enfranchisement, or to acquire a new lease [note 20].
Provided that the lease is of no value to the bankruptcy estate, the official receiver should not object to the application for leave.
Guidance on the disclaimer of a lease is in Chapter 34, paragraphs 34.9 to 34.14.
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