Member Article

Landlords and administrators - a balancing act

With Watson Burton LLP Law Firm

In the case of Innovate Logistics Limited (In Administration) v. Sunberry Properties Limited [2008] EWCA Civ 1261, the Court of Appeal made a strong affirmation of the balancing exercise laid down in the case of Atlantic Computers. They confirmed that the Court should weigh up the legitimate interests of a landlord with how any proceedings brought would affect the administrator’s plans to maximise payments to the other creditors of the company.

Innovate were a frozen food distributor who leased a property for storage from Sunberry on which twenty years of the Lease remained. Innovate entered into administration and sold the business as a going concern to Yearsley Holmewood Limited in the form of a “pre pack” but excluding the existing book debts. Pre packs are a regular occurrence in the current climate and essentially involve a collection of the business assets being bundled together and sold to another company as a going concern. The aim of the arrangement was to sell the existing stock in order to create as much money as possible for the creditor’s fund.

In order to facilitate this, Innovate granted a six month temporary occupational Licence to Yearsley to allow them to clear out the goods in the property and fulfil existing contracts. This was a breach of covenant under the Lease but suited Yearsley as they did not want to take an assignment of it because the property was not required for long term use by their business. Sunberry applied to the Court for leave to bring proceedings to terminate the Licence with the principal aim being to increase their bargaining position with Yearsley and force them to take assignment of the Lease, thus preserving their future rental income.

Although some evidence was omitted at the initial hearing and this contributed to the decision at first instance, the Court of Appeal overturned the judgment and refused Sunberry’s entitlement to bring a claim to terminate the Licence. They stated that the interests of the Landlord, including the extent of the loss which they would suffer should leave to bring proceedings not be granted, should be balanced against the interests of the creditors and that the Landlord had to prove that it was inequitable for the Court to refuse permission to bring such proceedings. Sunberry could not show this. They were in fact in a better position under the current arrangement than they would have been if the Lease had been forfeited.

While in occupation, Yearsley were paying passing rent and the only reason that Sunberry wanted the termination was to force Yearsley to take assignment of the Lease in full. If the injunction was granted, the collection of book debts would be substantially prejudiced and this far outweighed the loss of bargaining position suffered by Yearsley.

What this means is that with administrations currently on the increase, a commercial Landlord’s position is a difficult one as it is hard for them overcome the interests of other creditors.

If you have any comments or questions about this article or any Insolvency or Property matters, please contact Anthony Otterson of Watson Burton LLP at anthony.otterson@watsonburton.com.

This was posted in Bdaily's Members' News section by Ruth Mitchell .