With commentators predicting that the real impact of last summer’s credit crunch on corporate liquidations has yet to be felt, how can landlords and tenants of commercial properties prepare for a potential rise in the number of corporate insolvencies?

LANDLORDS’ REMEDIES - THINK OUTSIDE THE BOX

The landlord of a commercial property faced with an insolvent tenant will usually have two concerns:

There is a prevailing view that landlords have not fared well in recent developments in insolvency law aimed at furthering a culture of corporate rescue. However, landlords should give a broad welcome to a recent case which sought to deal with the complicated question of what expenses should be considered as “expenses of an administration”.

Administrators to the rescue

The defendant was the sole director of a company which went into liquidation. Almost six years after his appointment as liquidator, the claimant commenced proceedings seeking an order pursuant to s 212 Insolvency Act 1986 that the defendant contribute to the company’s assets on the basis that he had acted in breach of duty of care and skill and in breach of fiduciary duty owed to the company, which had resulted in the company’s deficiencies.

MB had been the secured tenant of a property in which she lived with B, and which she had bought at a substantial discount. The property was conveyed into the joint names of MB and B as joint tenants. Although MB’s mortgage company had insisted the property be in joint names, she claimed that the intention had always been that B would only have a minimal interest in it. He had made no contribution to the purchase price, mortgage repayments or household expenses. When MB had ascertained the effect of the joint tenancy, she gave notice of severance to B.

Re Powerhouse Limited: Prudential Assurance Company Limited v PRG Powerhouse Limited [2007] EWHC 1002 Ch Guarantees are widely used in commercial transactions to provide assurance to creditors that debts or other obligations owed to them are discharged fully in the event the principal debtor fails to perform. This assurance was shaken by the steps taken in early 2006 by PRG Powerhouse Limited (Powerhouse) to enter into a company voluntary arrangement (CVA) that contained proposals to release certain parent company guarantees given to landlords of premises being vacated by Powerhouse.

At the end of 2006 a decision of the Court of Appeal in Churchill v First Independent Factors and Finance Limited (Churchill) caused consternation among those involved in the management of insolvent companies who are also involved in the management of the company that acquires the whole or a substantial part of the insolvent business.

A husband and wife jointly owned their property. In matrimonial proceedings, the husband was ordered to transfer his interest in the property to the wife. Following his bankruptcy, the husband’s trustee applied to set aside the property transfer on the basis that it had been made at an undervalue, and the wife had given no consideration in money or money’s worth within the meaning of s339 of the Insolvency Act 1986. The wife contended that the fact that she had foregone ancillary relief claims was capable of amounting to consideration.

A recent decision from the High Court has shed some light on the remedies available to landlords under insolvency legislation against tenants who enter into administration. The decision provides useful guidance on the ability of a landlord to exercise its right of forfeiture.

In a decision that will have important repercussions for creditors with the benefit of guarantees, the High Court this week has held that a company in financial difficulties may not propose a voluntary arrangement which is unfairly prejudicial on its terms to certain creditors.

Re Powerhouse

In an important decision for commercial property landlords, the High Court in Prudential Assurance Co Ltd and Others v PRG Powerhouse Limited and Others has ruled that a CVA (defined below) cannot operate so as to prevent landlords from enforcing a parent company guarantee. The Court's decision however was reached on the basis that to determine otherwise would have been "unfairly prejudicial" to the landlords.