I’ve been asked this question several times by business owners recently, so I thought I’d blog on it…

If your company goes into liquidation, the liquidator is under a duty to ascertain if the lease to the property used by your company  is of any value.  In over 95% of cases, the lease will be valueless, so the liquidator will bring the lease to an end once he’s finished using the property for what he needs to do in the liquidation – that way he’ll extract himself from having to continue paying rent, looking after the property, etc; he’ll free the property up for the landlord to sell or let it; and he’ll set the financial position between the tenant and landlord – work out what the company owes the landlord.

Interestingly the law gives him some pretty unusual, and very strong, powers to bring the lease to an end – these are powers that no one else anywhere  has.  But to use those powers he has to follow a process.

The power he has is called ‘disclaimer’.

What does disclaimer achieve?

Disclaimer ends all of the tenant’s rights, interests and liabilities in the property, enabling the tenant to get out of the lease before the end of the lease term.   Disclaimer also has a big impact on a landlord because his income from the property will abruptly stop.  And the landlord is powerless to stop the liquidator disclaiming a lease – unlike a ‘surrender’ the liquidator does not have to negotiate a disclaimer with the landlord, the liquidator can force the disclaimer on the landlord.

What does the liquidator do first?

His first step is to get a professional valuation of the tenant company’s interest in the lease – liquidators can only disclaim assets if they’re of no value, if the lease is what the law calls ‘onerous property’ – he has to have a letter of advice from an expert in valuing property leases telling him that the liabilities attaching to the lease (rent, maintenance/dilapidation costs) exceed any potential value.  As the liquidator is no expert on valuing assets, he’ll get an agent to value the lease – this doesn’t have to be an expensive exercise, sometimes it can even be done as a largely desktop based exercise for about £100 – £150.

When can the liquidator disclaim the lease?

The liquidator can disclaimer a lease at any time while the company is in liquidation.  This can leave the landlord and any guarantors in a difficult position, as they don’t know whether or when the lease will be disclaimed.  It is obviously unfair to keep  landlords and guarantors hanging mid air so the law has given the landlord a power to serve a “notice to elect” on the liquidator – this gives the liquidator 28 days to disclaim and if he doesn’t he loses his right to do so (but the liquidator can apply to court to extend the 28 days).  Neither of these happens often – after all the liquidator is eager to effectively get his name off the lease!

If the liquidator needs to use the property for a while, does he have to pay rent?

Liquidators often need to retain the property to enable him to sell the assets in it.  It’s only reasonable that the liquidator pay for such continued use of the premises – and the liquidator is now, following the recent Game case, obliged to pay rent for the period of continued occupation post liquidation as an expense of the liquidation, paid in priority to other debts and most other costs, including his own remuneration. So yes, he does have to pay rent – over the years I have seen a good number of insolvency practitioners (‘IPs’) fail to pay rent on properties used by a company over which they’re appointed, the Game case has helped landlords by once and for all confirming that rent must be paid – the failure to pay rent is now a much more serious matter than it was in the past and suspect IPs who simply abused landlords by not paying will now be dealt with harshly by the courts.  Frankly, I’ve never understood my fellow IPs who simply declined to pay or failed to set the strategy for dealing with the tenant’s insolvent position properly by assuming they could walk all over landlords.  But then again, I do the right and just thing, and not all IPs do.

Can the liquidator regain access if the lease has already been forfeit?

Occasionally I come across the situation where a landlord has already ‘forfeited’ – that’s to say brought the lease to an end in another way, say for failure to pay rent, etc – the lease, but the property is still needed for the purpose of the insolvency.  In these cases I have successfully obtained relief from forfeiture, giving me the use of the premises for a while (but obviously paying rent) before later disclaiming the lease when the property is no longer needed.  So an earlier forfeiture may not be the end!

Once a liquidator has decided he now needs to disclaim the lease, how does he do it?

It’s a very simple process.  The liquidator just prepares a form, called a notice of disclaimer.  He sends it to the Registrar of Companies.  And to the Land Registry if the lease is registered.  The liquidator also sends a copy, within seven days, to the landlord and anyone else with any interest in or liability in respect of the lease – this includes sub-tenants, mortgagees and guarantors.  It really is that simple, although occasionally he might need help from a lawyer!

It should be noted however that he cannot disclaim part of the property – he has to disclaim the entire lease or nothing, there’s no middle ground.

What’s its effect?

– on former tenants and guarantors

Disclaimer does not affect the rights or liabilities of any other person, except as is necessary to release the tenant from liability. This means that former tenants (who have not been released) and guarantors remain bound – and importantly not just in respect of the period prior to the disclaimer, but also going forward for the rest of the lease term.

Often the landlord will be able, from terms within the lease itself, to require a former tenant or a guarantor now take on a new lease of the property on the same terms as that which has been disclaimed.

– on the landlord

You can expect the landlord to do his best to ensure that any former tenant and any guarantor remain bound – so he will not take back possession of the property if he thinks the former tenant or guarantor are strong covenants and will continue to pay rent etc. This means he will not accept the keys or secure the property. You see if the landlord takes possession, the lease is deemed to have been surrendered in which case all third party liabilities and obligations fall away. As the landlord will want to avoid taking back the property if he has a ‘strong’ former tenant or guarantor on the hook, he doesn’t have to mitigate his losses, he cannot try to re-let the property.

After a property has been disclaimed, responsibility for paying rates reverts to the person now entitled to possession – and often this is the landlord.  The landlord will have to pay even if he has no income coming in from the property because it’s not let.  As this can be a big burden  on a landlord.

– on subtenants

Although the sublease no longer exists because the headlease has essentially been torn up, the subtenant’s interest in the property continues – after all it would be unfair to throw him out for reasons outside of his control.  The subtenant can remain in the property  until the date when the sublease would have expired.  If he is occupying the entire property, he must pay the headlease rent and comply with the headlease covenants. If he is occupying only part of the property, he is exposed as there are no provisions in insolvency law to deal with this situation; so if he wishes to continue using the part he’s presently occupying, it’s vital that he negotiates with the landlord.

The terms of the headlease cannot be enforced against the subtenant.  This means, for example, that the landlord cannot force the subtenant to make good the premises under any repair covenant in the headlease – but nevertheless the landlord can still throw the subtenant out if he refuses to make good the repairs (although the subtenant can apply for relief).

As the sublease is treated as ended when the headlease is disclaimed, the subtenant is no longer bound by the terms of the sublease.  This means that if he wishes to move out, he can, and if he does, he has no obligation to pay any further rent or comply with any covenants in that sublease.

As you can appreciate, it can be messy!

Vesting orders

You will have gathered that the terms of the headlease and sublease are not directly enforceable either by a landlord on a subtenant, or vice-versa.   This leaves the landlord and subtenant in limbo.  To try to rectify this, the law gives the courts the ability to make an order vesting the property in the subtenant and guarantor, or indeed any former tenant. As it’s a court process, it means spending money, time and effort – it’s often a good idea to negotiate a new lease instead, even if it’s on the same terms.

If negotiations break down then either the landlord, the subtenant, any guarantor, or any former tenant can apply for a vesting order. But the application must be made within three months of the applicant becoming aware of the disclaimer – time is of the essence.

The typical vesting order provides for the applicant to take on the lease on exactly the same terms as those the liquidated tenant signed up to – the point is the party in which the lease vests becomes liable for all pre-existing breaches.  If it is the landlord who has applied for the vesting order but the subtenant, guarantor, or former tenant declines to accept the vesting of the lease, their rights, interest and liability in respect of the property determines. Landlords are therefore reluctant to apply for vesting orders as doing so can hurt them financially.If it is the subtenant who applies for the vesting order of a part of a property, he will probably not succeed unless he takes on the obligations of the liquidated tenant for the whole of the property: you see there are no provisions for apportioning the responsibilities or liabilities for the site.

Again, it can be messy!

As you can see from the above, disclaimer is a great, and simple tool in the majority of cases – but in a small minority of situations, it can have a nightmare effect – so if the property circumstances are complex, take advice from a good lawyer and work closely with your IP.  We are experienced in these matters, just call me if you’d like to discuss your situation.

Paul Brindley
– licensed insolvency practitioner

01902 672323