Disclaiming a Lease – a way to get rid of those unwanted onerous leases?

This article is kindly contributed by Stephen Browne, a partner in the Deloitte Restructuring Services team. Stephen's contact details are at the end of the article.

Clients often approach us thinking that there is nothing they can do about unwanted leases, other than find a new tenant and re-let the premises. This situation can often arise after an acquisition or a change in strategy. Worse still, we are often presented with a situation where the client has a property strategy whereby everything, including onerous leases, are transferred to a property company within the group and thereafter it becomes part of the annual void cost, if not re-let.

There is another way - a liquidator of a company in voluntary liquidation has the power to disclaim an onerous lease. Importantly, the power to disclaim a lease is available in a solvent liquidation and this can be a useful restructuring tool to help clients terminate unwanted leases.

What does a disclaimer do?

Put simply it forces the landlord to accept “a surrender” as the disclaimer serves to terminate the obligations under the lease. The liability remains but this becomes a damages claim in the liquidation and has to be mitigated with anticipated future rentals from a new tenant. The claim therefore comprises the difference between the passing rent and the current market rent, with a void period to allow time for a new tenant to be found, plus dilapidations. The claim is then discounted to reflect the fact that it is being paid early. The leading case on this is Re: Park Air Services plc (Park Air) which was a solvent liquidation.

So what is the catch?

Some leases have guarantees which oblige the guarantor to take on a new lease for the remaining term in the event of a default. If there is an obligation of this nature it will need to be reviewed carefully to see if payment of the claim in full discharges the guarantor’s obligation. For leases written after 1 January 1996, with authorised guarantee agreement (“AGA”) provisions, there is normally a standard disclaimer clause that obliges the outgoing tenant to give a guarantee and to take on a new lease for the remaining term if the lease gets disclaimed. So again, care needs to be taken that settlement of the claim fully discharges any liability under the AGA for the guarantor.

What happens if there are sub-tenants?

If there are sub-tenants, the under-lessee has the right to remain in the property in accordance with the underlease terms. They have legal status of “irremovability”. In practical terms any sub-tenants help confirm the rental income for the Park Air claim calculations. Obviously the rent received from sub-tenants must be paid to the landlord post disclaimer as they go with the lease.

How does it work?

The company must be in voluntary liquidation before the right of disclaimer exists. The company must therefore be capable of being placed into liquidation.

In group situations a disclaimer is not an option if unwanted leases are held in a key trading company. Whilst it may be possible to assign the unwanted leases to another company that is suitable for liquidation, landlord’s consent is likely to be required and the landlord may claim foul play/breach of process if that company is then placed into liquidation shortly thereafter.

As stated above, the key is not to transfer unwanted leases to a company within the group that is strategic or has important assets within it as this will restrict the ability to disclaim the leases.

Other considerations

It is very difficult to take a company out of liquidation – it is therefore essential that a full understanding of all the history and contracts is obtained and reviewed. In addition, the tax implications should also be reviewed to ensure no adverse impact will occur irrespective of the lease and property position.

From experience it is best to inform the landlord that the company is going to being placed into liquidation and try to agree and pay the claim before liquidation. This avoids having to pay statutory interest on the claim (currently 8% pa from the date of liquidation to the dividend payment date). It also flushes out any guarantees that may have been forgotten about!

Another favourable point is that business rates are not payable by a liquidator, providing the premises are vacant and not being used for the benefit of the winding-up. This can be very helpful where it has not been possible to agree the landlords claim pre-liquidation as it may prove a greater saving than the interest cost of 8% referred to above.

Landlords can often, at first, see this as an abuse of process, but they will then come round to it particularly on payment of the Park Air claim. The better your covenant the more uncomfortable this can feel initially but, based on experience, the key is to enter into an open and early dialogue with the landlord, particularly after an acquisition, so the disclaimer can effectively be dealt with in the name of the acquired business. Also relationships with landlords who have leased multiple properties to a group need to be thought about and carefully managed.

Stephen Browne, the author, is a partner in the Deloitte Restructuring Services team and has led a number of Corporate Simplification assignments that have included disclaiming leases. He can be contacted at: Deloitte LLP, Athene Place, 66 Shoe Lane, London, EC4A 3BQ, United Kingdom

Tel +44 (0)20 7007 8926 | Fax +44 (0)20 7007 3442 | Mobile: +44 (0) 7710 378740 | Email stebrowne@deloitte.co.uk | www.deloitte.co.uk