MATTERS TO CONSIDER PRIOR TO THE ISSUE OF A DISCLAIMER

PART 1

September 2008

MATTERS TO CONSIDER PRIOR TO THE ISSUE OF A DISCLAIMER

34.3 Considering a disclaimer – general

A disclaimer should be considered where the official receiver, as liquidator or trustee becomes aware of property in the estate that has no value, and to which there is an obligation to perform some onerous task.  This is described in the legislation as “onerous property”; being an unprofitable contract, or any other property comprised in the insolvency estate which is unsaleable or not readily saleable, or is such that it may give rise to a liability to pay money or perform any other onerous act [note 1] [note 2].  

Whilst, in these circumstances, a disclaimer should be issued as soon as possible, care should be taken not to disclaim an interest in property having a value to the estate which, instead, should be dealt with as any other asset.

 

34.4 Power to disclaim

The official receiver can disclaim only when he/she is acting as liquidator or trustee [note 3] [note 4].  He/she has no power to disclaim when acting as receiver and manager or interim receiver.

 

34.5 Timing of a disclaimer

Ideally, the official receiver when acting a liquidator or trustee should disclaim onerous property as soon as possible in order to minimise the exposure to a liability [note 5] [note 6].  See paragraph 34.9 for a circumstance in which it may be appropriate to delay the issue of a disclaimer.

 

34.6 Definition of property

As a disclaimer can only be issued in respect of property, it is important to understand what is meant by this term in the context of insolvency proceedings.  The Act defines property as including “money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property.” [note 7].

The fact that the property held may be of no value to the creditors is irrelevant; it is the general nature of the property or property right and not its value in particular circumstances which determines the issue [note 8].

Property must involve some element of benefit or entitlement for the person holding it [note 9].

 

34.7 Types of property over which a disclaimer may be issued

Typically, most disclaimers will be issued in respect of leased property.  Having said this, there is no limit to the type of property that may be subject to a disclaimer (though see paragraph 34.24 regarding disclaimers and motor vehicles).  Apart from leased property, common examples of property in relation to which a disclaimer may be issued include freehold property, contracts, licences, shares or rights of action.

Where the insolvent is tenant of only part of a premises demised by a tenancy, the power to disclaim is exercisable only in relation to the part of the premises of which the insolvent is tenant [note 10].

 

34.8 Obtaining information regarding property

When the official receiver is undertaking an inspection or preliminary interview, sufficient information should be obtained to allow for an effective decision to be made regarding whether or not the property should be disclaimed; and to obtain sufficient information for the completion of the relevant statutory form (see paragraph 34.52), if that is the decision taken.

Where the official receiver is dealing with property subject to a lease, he/she should consider obtaining the following:

Copy of lease

Any sub lease

Any assignments

Guarantors

Details of solicitors or property management agents acting

Any authorised guarantee agreement (see paragraph 34.13)

Other interested parties

Charge holder details

Arrears of rent

The official receiver’s enquiries should not be limited to property in which the insolvent has a current interest, but should extend to leases in which the insolvent has had an interest (see paragraph 34.12 and 34.13). 

Where the property in question is a dwelling house, the bankrupt should be asked to identify all persons who occupy, or who have a legal right to occupy, the property, together with the addresses of those persons where they are currently living elsewhere, as these persons will need to be served with a notice of disclaimer (see paragraph 34.57).

 

34.9 Valuation prior to disclaimer

Property should not be disclaimed where it has a value in excess of any obligations attached to it and is readily saleable.  Consideration should be given to the effect of any forfeiture clause in the case of the insolvency of a party in relation to property such as a lease or a contract.  In cases of doubt the official receiver should instruct agents to carry out a formal valuation of the property.

See also paragraph 34.16 regarding tenant’s rights when considering the value of property.

 

34.10 Valuation of leasehold property

The official receiver is not expert in valuing leases and when in doubt a valuation should always be obtained. Where the official receiver’s experience in dealing with a lease suggests that the lease is unlikely to have any value, or the existence of a forfeiture clause (see paragraph 31.3.363) on an insolvency event would suggest the official receiver is unlikely to be able to sell the lease then funds should not be expended in obtaining a valuation simply to confirm the official receiver’s view. 

See also paragraph 34.16 

 

34.11 Disclaimer of property held under a lease

The vast majority of disclaimers issued by official receivers will be in respect of property held under a lease.  Where an insolvent is the current lessee of property at the time of the insolvency order, the insolvent’s interest in that property should be disclaimed if it is unsaleable or not readily saleable, or is burdened with any liability to pay money (for example, rent or maintenance charges), or gives rise to any other liability to pay money or to perform any other onerous act (for example, to maintain or upkeep the property).

See also paragraphs 34.12 to 34.13 regarding actual or contingent liability under a lease assigned from the insolvent prior to the insolvency order) and paragraph 34.15 regarding tenancies excluded from the bankrupt’s estate.

Where an insolvent is a joint lessee, only the insolvent’s interest in the lease can be disclaimed.

See paragraph 34.81 for information on the disclaimer of fixtures.

See paragraphs 34.28 and 34.78 where property held under a lease has a sitting sub-tenant.

 

34.12 Continuing obligations under leases

Where a tenancy was created before 1 January 1996, an insolvent may have obligations under the lease (this is referred to as “privity of contract”) despite the fact that they have assigned it to a third party [note 11].  The obligation may be after an assignment where the original lessee may remain liable under covenants [note 12]

Whether or not the tenancy was created before 1 January 1996 the insolvent may have a liability under the lease where a guarantee was given to the landlord.

See paragraph 34.13 for further information on privity of contract. 

 

34.13 Authorised guarantee agreements

For tenancies created after 1 January 1996, the concept of liability under privity of contract was discontinued [note 13] (see paragraph 34.12).  A landlord may require a tenant who assigns a lease to enter into an “authorised guarantee agreement”, under which the tenant who assigns the lease or tenancy may guarantee performance of the tenant’s covenants by the assignee, but not any subsequent assignee [note 14].

In the case that the insolvent is party to an authorised guarantee agreement the disclaimer wording (see paragraph 34.53) should reflect this (for example “the authorised guarantee agreement dated [date] and related lease…….”).

 

34.14 Disclaimer of a tenancy

The majority of tenancies encountered by official receivers will be in connection with the bankrupt’s residence.  Many tenancies are excluded from the bankruptcy estate by operation of law (see paragraph 34.15) and, therefore, a disclaimer would not be appropriate.  From the point of view of considering a disclaimer, official receivers should treat those tenancies not excluded (including those in a liquidation) as leases and follow the information and guidance in paragraph 34.11.

 

34.15 Exclusion of certain types of tenancies

The following types of tenancies do not form part of the bankrupt’s estate [note 15] (unless actively claimed by the trustee [note 16]) and, therefore, a disclaimer would not be appropriate:

Assured tenancy within the meaning of Part I of the Housing Act 1988, and the terms of which inhibit an assignment.

Assured agricultural occupancy within the meaning of Part I of the Housing Act 1988, and the terms of which inhibit an assignment.

A protected tenancy, within the meaning of the Rent Act 1977 in respect of which no premium can lawfully be required as a condition of assignment.

A tenancy of a dwelling house by virtue of which the bankrupt is, within the meaning of the Rent (Agriculture) Act 1976, a protected occupier of the dwelling house, and the terms of which inhibit an assignment.

A secure tenancy, within the meaning of Part IV of the Housing Act 1985, which is not capable of being assigned.

In practice many council, housing association and private landlord tenancies in respect of dwelling houses will fall under one of the categories listed above.  In cases of doubt, the official receiver should inspect the tenancy agreement before ruling out a disclaimer.

 

34.16 Tenant rights

Certain leases or tenancies may include what are known as “tenant’s rights”, such as the right to grow and harvest crops, graze livestock or hunt animals.  These rights will be lost to the liquidator or trustee if a disclaimer is issued in respect of the lease or tenancy.

As the rights themselves may have a value in excess of any liabilities due under the lease or tenancy, the official receiver should assess the benefits likely to be achieved by retention of the property against any obligations which will have to be performed while the property is retained.  It is likely that the official receiver will need to employ agents to assist with the valuation.  Property should not be retained without adequate indemnities from creditors as regards payments to be made.

 

34.17 Disclaimer of licence to assign

Where the insolvent’s interest in the lease is by way of a licence to assign, the description of the property on the notice of disclaimer (see paragraph 34.52) should cover both the interest in the licence to assign and the original lease.  Having said this, it has been held that a disclaimer of a licence to assign is effective as a disclaimer of a lease [note 17].

 

34.18 Surrender of a lease

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 (see paragraph 34.52 and 31.3.359 to 31.3.362 for more information on this). 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. If it is not beneficial to the estate to disclaim the lease or tenancy, the guidance in paragraph 34.52 for formal surrender may be followed – though this is appropriate only for company cases and, even then, only in exceptional circumstances.

Ideally, the official receiver should issue a disclaimer even when the landlord is prepared to accept possession by way of a 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.

 

34.19 Disclaimer of a lease that has been terminated

A lease may be disclaimed even if it has been terminated – whether by expiration of the period of the lease or by forfeiture [note 18] [note 19].  The reasons why this may be necessary are explained at paragraph 34.12 concerning contingent and continuing liabilities.

 

34.20 Lease held in trust for another

A lease held in trust for another person by an insolvent may form part of the company’s estate or vest in the trustee in bankruptcy [note 20].  It is, therefore, appropriate that, where a company in liquidation or a bankrupt has an interest in a lease as trustee, a disclaimer is issued (assuming a disclaimer is otherwise appropriate).

 

34.20a A disclaimer of property overseas

Occasionally, it will be necessary for the official receiver to disclaim property situated overseas.  The effect of the disclaimer, especially where the property is outside the EU, is open to question and the disclaimer may not be recognised in the country in which it is issued, depending on the law of that country [note 20a].

Where, however, action is taken, in the foreign jurisdiction, against the official receiver, as liquidator or trustee, in relation to the disclaimed foreign property, the disclaimer will make any resultant judgment unenforceable in the English/Welsh courts, thereby affording the official receiver some measure of protection.

Annexes B, C and D are documents that explain the effects of a disclaimer in German, French and Spanish respectively. Annex E is an English translation of those documents.     

 

34.21 Disclaimer of a licences or permits for dealing with waste

In order for a business to deal in controlled waste it must hold a permit or a licence issued by the Environment Agency.  Formerly, businesses were issued with Waste Management Licences, but these are gradually being replaced by Pollution Prevention and Control Permits (see paragraph 82.1).

It has been held that Waste Management Licences are property as defined by the Act [note 21] and can, therefore, be disclaimed as onerous property [note 22].

On this basis, the official receiver should disclaim, where appropriate, his/her interest in a Waste Management Licence or Pollution Prevention and Control Permit.  It should be noted, however, that a disclaimer of a Pollution Prevention Control Permit has yet to be tested in court, and the Environment Agency has indicated that it would challenge such a disclaimer.

Where the official receiver is disclaiming an interest in a Waste Management Licence or a Pollution Prevention and Control Permit he/she should ensure that both the Environment Agency and the local authority Environmental Health Department are sent notice of the disclaimer (see paragraph 34.52).

Issues surrounding environmental protection (including disclaimers in such matters) are fully explored in Chapter 82.

See also paragraph 34.22 regarding disclaiming waste.

 

34.22 Disclaiming waste

Where waste is disclaimed the official receiver should serve notice of the disclaimer on the Environment Agency and the local authority Environmental Health Department.  Waste should not be disclaimed where it is on land which is part of the insolvent’s estate (i.e. a vesting lease or a solely-owned freehold property, but not a non-vesting tenancy (see paragraph 34.15) or a jointly-owned freehold property), unless the land or tenancy to the land is also disclaimed as, to do so, may result in the official receiver being considered to be keeping waste, which is an offence without the appropriate permit.

The official receiver will, therefore, need to consider the value of the land or tenancy against the costs of dealing with the waste before deciding if a disclaimer is appropriate.

See paragraph 82.17 of Chapter 82 – Environmental Legislation for further details on this.

 

34.23 Disclaiming a mine

Where a mine is abandoned the person abandoning the mine is required to carry out various duties such as issuing notice to interested parties (see paragraph 82.28 for full details).

Where a disclaimer is issued in respect of a mine, it will not be deemed to be an abandonment of the mine and, therefore, the duties detailed in paragraph 82.28 need not be carried out.  Notice of the disclaimer (see paragraph 34.52) should, however, be sent to the Environment Agency (http://www.environment-agency.gov.uk/).

 

34.24 Disclaimer of motor vehicles (amended March 2012)

Motor vehicles are subject to strict rules regarding disposal and any person (including the official receiver where a motor vehicle vests) not complying with those regulations may leave themselves open to financial sanctions, even where a disclaimer has been issued.  For this reason, the Insolvency Service has taken a decision that the issuing of a disclaimer is respect of a motor vehicle would be appropriate in only limited circumstances (see Chapter 31.2, paragraph 31.2.66).

It is, in any case, extremely unlikely that the official receiver would have cause to issue a disclaimer in respect of a motor vehicle.  If the motor vehicle has an inherent value then it will either be realised (see Chapter 31.2, Part 3), or treated as exempt property (see Chapter 30, Part 6).  If, on the other hand, the vehicle has no realisable value (and cannot be treated as exempt property) then it will be dealt with under the procedures for dealing with “end of life” vehicles (see Chapter 31.2, Part 4).

Where a disclaimer is issued in respect of a motor vehicle, and the vehicle is registered in the UK, notice of the disclaimer (see paragraph 34.52) should be served on the Driver and Vehicle Licensing Agency (DVLA).

 

34.25 Disclaimer of a lease relating to an Islamic mortgage

Where a person has entered into an agreement to purchase a property under an Ijara or Diminishing Musharaka scheme the property is held in trust with the trustees granting a lease to the person covering the term over which it has been agreed that he/she will purchase the property.

With an Ijara payments made towards the purchase price of the property at the date of the bankruptcy order may give rise to a beneficial interest in the property which would form part of the bankruptcy estate, or be a debt payable by the bank to the bankruptcy estate (the contract of sale having been uncompleted).  With a Diminishing Musharaka the bank’s beneficial interest transfers to the borrower once agreed payment stages are completed.  By the end of the rental period, the borrower will hold a 100% beneficial interest in the property and will require the trustees to transfer legal title.

With both the Ijara and Diminishing Musharaka, at the date of the bankruptcy order the property would not vest in the bankruptcy estate, as the legal and beneficial owner is the bank.  Any agreement to purchase the property is a contract capable of vesting in the trustee in bankruptcy as is the lease agreement.  Forfeiture or disclaimer of the lease might defeat any interest the trustee in bankruptcy holds in the property. Where a disclaimer is considered in this respect, care should be taken that the beneficial interest in the property is not lost through a carelessly worded disclaimer aimed at the lease agreement.

Further information on Islamic mortgages is contained in paragraphs 31.3.38 to 31.3.41.  

 

34.26 Disclaimer of a right of action

As with any other property, it is open to the trustee to disclaim a right of action where it is considered to be onerous property [note 23]. Once disclaimed it is not possible for the right of action to be vested back to the bankrupt [note 24].  Consequently when considering a disclaimer the official receiver should be careful to avoid giving the impression to the bankrupt that they would be able to regain control of the action by way of a vesting order.  The reasons for this are discussed in detail in paragraph 34.93.

Whilst the Act [note 25] makes it clear that a disclaimer operates to bring the interest of a bankrupt and his/her estate in the disclaimed property to an end, it does not follow from this that the property itself ceases to exist.  In view of the effect of a disclaimer on the interest of the bankruptcy estate, it may in some cases be preferable to refrain from disclaiming the right of action, where it is not possible to assign or settle it at that time, so that the matter may be revisited in the future, subject to the expiry of the limitation period.  However, different considerations would apply if proceedings had been issued and the official receiver was being put under pressure by the parties to the proceedings (or the court) to deal with the matter.  In this case, it may be possible to settle the matter by way of a consent order (known as a “Tomlin Order”), with each party responsible for their own costs (see paragraph 19.35 for further information on Tomlin Orders).

A right to defend an action cannot be subject to a disclaimer [note 26] and it is not considered to be property, but merely a liability [note 27].

More information regarding rights of action can be found in Chapter 31.9 – Rights of Action.

 

34.27 Disclaimer of freehold property

The disclaimer of mortgaged or unsaleable freehold property may be necessary where such property has some onerous condition or liability attached.  Examples of this may be where a local authority has made a demolition order, or there is a responsibility to pay for the upkeep of the property.  This would not include property that cannot be disposed of only because there appears to be no available equity – for which, the guidance in Chapters 31.3 should be followed.

As an alternative to issuing a disclaimer, the official receiver could consider issuing a notice for the property to re-vest in the bankrupt [note 28] (see paragraph 31.3.87].

Please see paragraphs 34.79 and 34.80 for the effect of jointly-owned and solely owned property, respectively.

 

34.28 Disclaimer and the Landlord and Tenant Act 1987

The Landlord and Tenant Act 1987 gives tenants the right to acquire a property where the landlord is disposing of it.  The Landlord and Tenant Act 1987 is comprehensively discussed in Part 5 of Chapter 31.3 and reference should be made to the information contained therein before issuing a disclaimer in respect of a freehold or leasehold property with sitting tenants.

See paragraph 34.78 for information on the effect of a disclaimer on a leasehold property with a sitting sub-tenant.

 

34.29 Disclaimer of shares

A disclaimer should be issued in respect of shares that may burden the estate with a liability in excess of their value.  For example, in the case of partly paid shares, or where a tax liability may accrue on sale.

See Chapter 31.5 – Part 5 – Stocks and Shares for information on dealing with shares with value, particularly paragraph 31.5.56 for circumstances where it may be appropriate to issue a disclaimer in respect of shares with minimal value.

In any case where a disclaimer is issued in respect of shares, the notice of disclaimer (see paragraph 34.57) should be sent to the company’s registrar of shares.

 

34.30 Disclaimer of a contract for sale

Where a bankrupt has entered into a contract for the sale of a property held under a lease, the trustee cannot disclaim the contract without also disclaiming the lease [note 29].

 

34.31 Notice of intended disclaimer

As detailed in paragraph 34.57 the official receiver is required to serve notice of the disclaimer on parties having an interest in the property.  Where the official receiver has information to suggest that a person has claimed, or will claim, an interest in the property but there is some doubt as to the veracity of that claim the official receiver may issue a notice of intended disclaimer [note 30] [note 31].  This notice [note 32] requires the person on whom it is served to declare the nature and extent of any interest in the property to be disclaimed. 

If the recipient does not respond within 14 days of the service, the official receiver can assume that he person has no interest in the property and may proceed on that basis [note 33] [note 34].  On the other hand, where there is a positive response, notice of disclaimer should be sent to the claimant.

 

34.32 Use of notice of intended disclaimer

It is not envisaged that the official receiver will need to make use of the procedure regarding the issue of notice of intended disclaimer, except in exceptional circumstances.  Where there is doubt regarding a person’s interest in the property it is likely to be appropriate to serve the disclaimer on them in any case.

 

34.33 Property claimed by trustee

Amended April 2010

Where, in a bankruptcy, the official receiver, as trustee, lays claim to after acquired property [note 35], exempt property exceeding the value of a reasonable replacement [note 36] or a certain type of tenancy [note 37] (see paragraph 34.15) he/she will not be able to subsequently disclaim that property without the court’s permission [note 38] [note 38a].

The application may be made without notice to any other party, and must be accompanied by a report giving details of the property, setting out the reasons why the property – having been claimed for the estate – is now to be considered for disclaimer and specifying the persons (if any) who have been informed of the trustee’s intention to make the application.  If the report states any person’s consent to the disclaimer then the consent must be annexed to the report [note 39].

 

34.34 Property (including leasehold property) subject to a charge

(amended January 2010)

A disclaimer ought not to affect a mortgagee’s position in relation to the property disclaimed due to provisions in the Act protecting the rights of third parties (see paragraph 34.69) [note 39a].

That said, where the official receiver is considering issuing a disclaimer in respect of property subject to a charge, he/she should first contact the charge-holder and bring this intention to their attention to afford them the earliest opportunity to consider making application for a vesting order (see Part 5), or to exercise their right to dispose of the property.

 

 

34.35 Disclaimer of an attornment clause

A lease may contain a clause (usually created by a mortgage) whereby the tenant agrees to become the tenant of a successor landlord, for example where a mortgagee has taken possession of the property.

Where there is an attornment clause in a lease, the trustee would remain liable for rent accruing after the property vested in him/her, unless the mortgage is for the whole residue of the term of the lease, as this property would not then vest in the trustee [note 40].  

It is unlikely that official receivers will encounter leases with attornment clauses, as they are rarely used.  They were, however, more common in the past and, therefore, are more likely to be encountered in older mortgaged property. 

 

34.36 Review of the official receiver’s disclaimer decision

Any person aggrieved by an act or decision of the liquidator may make application for a review of that act or decision.  That way, an aggrieved person can seek a review of the official receiver’s decision to, or not to, issue a disclaimer [note 41] [note 42].  Unless the decision to disclaim was in bad faith, or perverse, the court would not intervene to set aside the disclaimer.

Similarly, it is open to a bankrupt, or any creditor of a bankrupt, to make application to the court for a review of any act, omission or decision of a trustee [note 43].

 

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