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Insolvency can forfeit the right to forfeit

Hogan Lovells UK Real Estate

01 March 2013
You're a landlord. A business tenant goes bust. Getting them out and getting the lease back may not be as easy as you think.

It can be especially complex (and galling) where your tenant is succeeded by a new business with the same management, the same name and the same suppliers, still in your premises. These phoenix businesses (where a business goes bust and reopens) are increasingly common.

You may not mind. You may decide the phoenix business is better than a void, especially if the new business is likely to be in a stronger financial position than its predecessor. You could formally consent to assignment of the current lease or negotiate a new lease.

But if you want the business out, you may not be able to. As soon as a business goes bust, the running of it is taken over (usually) by an administrator. If the administrator can line up a buyer for the business, your right to forfeit the lease will depend on the administrator's consent or that of the court (this is laid down by the Insolvency Act 1986). Often a new buyer will be lined up in advance of the business going bust (this is called a pre-pack, where the bust business is pre-packaged for immediate sale on insolvency) – hence the (re)appearance of the phoenix business.

The administrator will not want to consent to forfeiture if that frustrates the purpose of the business sale. A court will balance your contractual and proprietary rights against the interests of the creditors as a whole.

It's possible to argue that, as the business has already been sold in the pre-pack, the creditors should not be prejudiced by forfeiture of the lease. But they – alert to the forfeiture risk – may have held back part of the price until the lease assignment has been completed. So this may not give you the certainty or clarity of action you want.

Hogan Lovells UK Real Estate

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