Landlords facing tenant insolvency

Many landlords are faced with the issue of tenant insolvency and increasingly this is due to the decline of the high street. A recent County Court decision has given some comfort as to how the Courts may be more accommodating to the landlord when seeking to forfeit a long lease previously granted at a premium.

There is a general understanding that the tenant of a long lease will be able to apply for relief from forfeiture as the Courts do not like to see a tenant lose a valuable asset where the landlord obtains a windfall.

The case of SHB Realisations Ltd and GB Europe Management Services Ltd v Cribbs Mail Nominee (1) Ltd and Cribbs Hall Nominee (2) Ltd has indicated that a landlord’s ability to forfeit a long lease should not be discounted.

In the SHB Realisations case, the landlord applied to the Court to forfeit the tenant’s lease. The lease was for a unit in a shopping centre, originally granted for 125 years at a peppercorn rent. At the time of the landlord’s claim to forfeit, the shop was a closed former BHS store. The lease (like many shop leases) contained a covenant for the tenant to keep the shop open during usual trading times.

As with many former BHS stores, the shop was permanently closed in August 2016. The landlord served a notice of forfeiture in respect of the tenant’s breach of the covenant to keep the shop open with there being no likelihood that the breach would be remedied by BHS re-opening. The tenant’s only option was to transfer the lease to a third party; however the property had been marketed since June 2016 receiving no real interest.

In July 2017 the tenant and its mortgagee sought relief from forfeiture, asking the Court for an additional 6 months to allow time to assign the lease. They claimed that an assignment would be possible as the previous efforts to sell the lease had been hampered by various issues down to the landlord. These included the ongoing litigation (forfeiture application by the landlord) and the landlord’s planning application to extend the shopping centre. In response, the landlord counterclaimed for possession of the property on the basis that the tenant had been trying to sell the lease for 32 months to no avail and that should be more than an adequate length of time to find a buyer.

Whether or not a Court grants relief from forfeiture is at the Court’s discretion. In reaching a decision, a number of factors are taken into consideration including the impact on the tenant’s mortgagee, whether the breach is a wilful act and whether or not there was a market for the lease.

To counter this, a landlord would argue that the breach of covenant was incurable, the value of the lease had depreciated and there was little or no genuine interest in the lease. As a result, the landlord would suffer ongoing damage/losses if the lease was not forfeited.

The judge in this case granted the tenant conditional relief from forfeiture, allowing a further 3 months to find a buyer for the lease, failing which the lease would remain forfeit. It was acknowledged that the lease did retain some value, however there was no evidence to suggest that the market would improve and the Court gave little weight to the potential windfall the landlord would receive as a result.

This decision goes to show that the Courts are willing to consider forfeiting a long lease under certain circumstances.

Oliver Ray is a solicitor specialising in commercial property law in the Property department at Barker Gotelee Solicitors in Ipswich.

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