Commercial Property Focus - November 2009

Permission to Proceed – Can a tenant pursue a new lease when a landlord is in administration?

When a company enters into administration the principal aim of the administrator is to maintain the company as a going concern, to achieve a better result for its creditors than would be the case if the company was wound up or to realise assets so that secure or preferential creditors can be paid.  To enable this to happen the law prevents any legal action being taken against the company, whilst they are in administration, without the consent of the administrator or the Court.  In addition, any legal proceedings that have already been commenced against the company cannot be continued without consent. 

The obvious intention of this rule is to avoid any creditors suing the company or landlords / mortgagees seeking possession of its business premises which could prevent the company from continuing to trade.  However, the rule applies to all types of legal action and therefore also includes applications for lease renewals.  A recent case has shown how the Courts will deal with ongoing lease renewal proceedings when the landlord goes into administration during the course of those proceedings.

In Somerfield Stores Limited v Spring (Sutton Coldfield) Ltd (2009), Somerfield had applied for a new lease of a supermarket in Sutton Coldfield under the provisions of the Landlord and Tenant Act 1954.  Spring, their landlord, opposed their claim on the ground that it intended to redevelop the site.   During the course of the proceedings the landlord went into administration with the effect that the proceedings could not be progressed without either the consent of the appointed administrator or the permission of the Court. 

Somerfield approached the administrator for permission to continue the litigation.  However, this was refused as the administrator wanted to defer the proceedings until a scheme for redeveloping the land could be put in place, which may have included a potential sale of the property to a developer or a joint venture.  Once a proper scheme could be devised then the landlord would be in a better position to prove its ground for opposition and to seek possession of the property.  The administrator argued that it would take some time to devise such a scheme and argued that the lease renewal proceedings should be stayed in the meantime.

The basis of their argument was that the administration had been predominately for the benefit of the landlord’s bank which had a charge over the property securing debts much greater than the current value of the property.  The redevelopment would lead to an increase in value of the property of over £2 million and so significantly increase the funds realised in the administration.  Therefore, a delay in progressing the lease renewal proceedings to enable the landlord to prove its case for redevelopment would improve the bank’s position, as the bank was the only creditor likely to benefit from the redevelopment plan because of the debt owed to it.  Understandably, Somerfield was not happy for the proceedings to be delayed indefinitely as this would give the landlord more time to gather evidence to be able to prove his grounds of opposition and successfully oppose their application for a new lease.  They therefore applied to the Court for permission to continue the lease renewal proceedings.

Somerfield argued that they had a continuing tenancy and that under the 1954 Act they were entitled to a new tenancy unless the landlord could prove its ground of opposition.  Therefore the landlord was obliged to prove its ground for possession and this obligation was not altered by the fact the landlord had gone into administration.  If the landlord was not able to able to do so, because they were in administration, then a new lease should be granted and it would then simply be the terms of the new lease that would then need to be determined.

The Court ruled that the purpose of the administration included realisation of property in order to pay one or more secured / preferential creditors and the redevelopment scheme would have benefited the bank because of the additional £2 million that this was likely to generate.  However, it held that the aim of administration was not to improve the position of a secured creditor to the detriment of the other creditors or any third parties with proprietary rights, such as Somerfield who would be entitled to a new tenancy of the property.

Insolvency legislation makes it clear that in trying to achieve its aim, an administrator must not unnecessarily harm the interest of the creditors as a whole nor should they look to put secured or preferential creditors in a better position than they would have been in if there was no administration.  The Court stated that this principle should also apply to any third parties with proprietary interests and that third parties should not be prejudiced unless truly necessary to achieve the aim of the administration.  As Somerfield had a right to a new tenancy and a right to have its claim for a new tenancy heard without delay then that right should only be interfered with where it was necessary to achieve the aim of the administration.  The Court did not feel that improving the position of the bank, to the prejudice of the rights of Somerfield, was within the objectives of the administration and as the landlord’s other creditors would not have been affected whether the proceedings continued or were delayed for a year or so, the Court granted permission for the lease renewal proceedings to continue. 

This meant that the landlord remained under an obligation to prove their intention and ability to redevelop the property, despite the fact that they would be unable to do so because of the administration.   The fact that the redevelopment was clearly a possibility, provided certain hurdles could be overcome, would not change matters as the administrator would not be able to show that there was an actual intention to redevelop the property at the time of the hearing because of the number of issues still to be resolved.  

The Somerfield case clearly shows that Courts will not automatically refuse to allow litigation to proceed when a company goes into administration.  A balancing exercise must be carried out between the rights of the administrator to pursue their objectives in the administration and the rights and interest of creditors or other third parties.  This case is particularly interesting in that although the redevelopment would potentially have realised an additional £2 million of funds for distribution to the landlords’ creditors, this did not sway the Court’s decision as they were keen to ensure a creditor did not achieve an improved position to the prejudice of Somerfield in pursuing their right to a new tenancy and their right to have their claim heard without delay.  The decision to allow permission appears justified in light of the uncertainty that would have arisen for Somerfield if the proceedings were left in abeyance indefinitely, particularly as they intended to refurbish the store.  The aims of the administrator may still have been achieved in granting a new lease as the Court could grant only a short term lease or allow a break in the lease to enable the landlord to redevelop the property in the future.

Angela Penn, Property Litigation Solicitor, Weightmans LLP angela.penn@weightmans.com