In the case of Re Lomax Leisure Limited (Chancery Division) (Judgment delivered 22 April 1999 by Mr Justice Neuberger) the Court held that the landlord, RAT (Holdings) Limited ("RAT"), was entitled to forfeit a lease by peaceable re-entry despite the fact that the tenant company, Lomax Leisure Limited ("Lomax"), was a company in respect of which a petition for an administration order had been presented; the basis for this decision being that RAT’s right to forfeit did not constitute security over Lomax’s property and was therefore not restricted by the Insolvency Act 1986 ("the 1986 Act").
Facts
Lomax was a company formed in 1998 for the specific purpose of developing a night-club in premises which they leased from RAT. Another company, Lomax Car Parks Corporation Limited ("LCC"), provided funds to Lomax to enable them to meet the continuing costs of their contractors. The shareholders of Lomax included a director of RAT, and a director of LCC. By 7 April 1999 LCC became aware that Lomax was no longer able to pay its debts and consequently petitioned for an administration order on the basis that unless the company’s business was sold to a third party the lease would be forfeited. Despite the fact that the petition had been presented, RAT attempted to forfeit the lease with Lomax by peaceably re-entering the premises.
RAT’s purported forfeiture was primarily on the ground of arrears of rent in the sum of £116,000. In addition to its peaceable re-entry, RAT also presented a petition to wind-up the company on the ground that Lomax had not paid the rent and was insolvent.
LCC contended that RAT’s right to forfeit by peaceable re-entry was "security" as defined by s.248 of the 1986 Act. Consequently, s.10(1)(b) of the 1986 Act should serve to prevent RAT from exercising its right to forfeit at any time after a petition for an administration order had been presented, as this would amount to taking steps to enforce a security over the company’s property.
LCC also argued that to allow RAT to forfeit a lease vested in a company in administration, where that lease represented the only substantial asset of the company, would be wholly inconsistent with the thrust and purpose of the administration procedure.
Decision
Neuberger J decided that, although there was much conflicting case law, a landlord’s right to forfeit a lease for non-payment of rent could not fairly be described as "security over the company’s property", either as a question of ordinary language or within the meaning of s.248(b) of the 1986 Act.
Neuberger J held further, in contradiction to a body of existing case law, that the established view that the proviso for re-entry is a security for rent was only to be taken as meaning "security" in a colloquial sense, and not in the strict legal sense of the word. Whilst admitting that his conclusions appeared to run counter to the purpose of an administration order he also held that it was not legitimate to distort the meaning of the words used in order to achieve a result in keeping with the Parliamentary purpose.
Neuberger J therefore allowed RAT’s forfeiture of the lease by peaceable re-entry, dismissing the claim that section 10(1)(b) of the 1986 Act prevented RAT from doing so.
Comment
This case appears to provide landlords with what would be a powerful weapon in circumstances where their tenants are in administration. It remains the case however, that after legitimate forfeiture of the lease the tenant company could still claim relief from forfeiture on payment of the rent arrears. It would remain open to the Courts to refuse such relief, but this would probably require strong grounds for refusal, e.g. the breach of other covenants which the tenant was incapable of rectifying.
It must also be remembered that in this area decisions at first instance have been far from consistent and there is no guarantee that this case will be followed and it may yet be overturned on appeal.
This note is intended to provide general information about some recent and anticipated developments which may be of interest. It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained. If you would like further information or specific advice, please contact Tony Evans at Macfarlanes London Office.
