Lawbite: When can a business lease be forfeited for a tenant’s insolvency in England & Wales?

Summary

Most business leases include a forfeiture clause, reserving to the landlord the right of re-entry (termination) in the event of specified tenant breaches or events. The High Court recently considered a clause allowing re-entry where the tenant or its guarantor was unable to or deemed unable to pay its debts within the meaning of sections 122 and 133 of the Insolvency Act 1986 (IA 1986). The Court concluded that the right to forfeit only arose under this provision once the tenant or guarantor’s inability to pay its debts had been proved to the satisfaction of the court. This meant that, in this case, the right of forfeiture had not arisen prior to service of the landlord’s section 146 notice.  

It is not uncommon to find the wording in question, or very similar wording, in business leases and therefore the decision could have a fairly wide application. 

This case is particularly relevant to landlords and tenants of commercial leases of properties in England and Wales, together with their managing agents and property advisers. 

The purported forfeiture

The case concerned the second of two forfeiture claims brought by the landlord against its tenant in relation to leases of commercial premises in London.  

The leases reserved the usual right of re-entry for non-payment of rent, breach of tenant covenants or  specified conditions.  They also provided that a right of re-entry arose where the tenant or its guarantor was unable, or was deemed unable, to pay its debts within the meaning of sections 122 and 133 of the IA 1986.

Following a corporate reconstruction in the United States affecting the guarantor under the leases, the landlord sought to forfeit the leases by court proceedings contending, amongst other things, that the guarantor was unable to pay its debts within the meaning of the IA 1986.  

The tenant sought to strike out the claims, arguing that it was not in breach of condition because the test of whether a company is unable to pay its debts within the meaning of the IA 1986 require it to be proved to the satisfaction of the court.

The court's decision

The court struck out the application having concluded that the right to forfeit had not yet been triggered.  It agreed with the tenant, that the breach of condition relied upon by the landlord required the guarantor’s inability to pay its debts to have been proved to the satisfaction of the court prior to service of the section 146 notice. Only then would the right to forfeit have been triggered.

Key points

• while interpretation of a lease will turn on the facts, we regularly see this drafting, or very similar drafting, in commercial leases and it is likely to be similarly construed
• this decision provides parties to a lease with more certainty as to when a particular forfeiting event has occurred 
• however, it also means that a landlord may need to embark on potentially complex and expensive litigation to prove that a company is unable to pay its debts as they fall due before it can exercise its right of re-entry for this breach
• it may therefore be preferable to rely instead on such a determination in proceedings brought by a third party where possible e.g. a creditor’s winding up petition.  Alternatively, a landlord may wish to rely on one of the other events upon which a right of forfeiture arises