Legal update

What happens in the case of insolvency?

In his latest legal update, CooperBurnett LLP partner Tom Lumsden takes a look at what happens if a care provider who operates under a lease becomes insolvent

What would happen if a provider, which operates a care home under the terms of a commercial lease, becomes insolvent? By insolvent, for the purposes of this article, that means bankruptcy - in the case of an individual or individuals who are the tenants - or liquidation in the case of a company that is the tenant. When a company tenant goes into liquidation, or individuals are made bankrupt, the liquidator or the bankrupt’s trustee in bankruptcy, as the case may be, is allowed to disclaim any interest of the company or the individual, which that company or individual has in any ‘onerous property’.

A liquidator who disclaims a lease would, by doing so, end any ongoing obligations of the insolvent tenant relating to the property. The ending of those obligations takes place with effect from the date of the disclaimer notice. It is less clear what happens to the rights of other parties who have an interest in the disclaimed property.

In the case of a liquidation, a liquidator must collect in the assets of the company and realise those assets and use the funds so realised in order to discharge the company’s debts and liabilities. Any surplus would normally be distributed to those entitled to it. With a company liquidation, the assets do not vest, i.e. transfer to the liquidator, but the liquidator acts in effect as an agent of the company. With individuals who are declared bankrupt, the bankrupt’s trustee in bankruptcy has very similar powers to those of a liquidator, although the legal ownership of the bankrupt’s property vests in the trustee in bankruptcy. An exception is where a lease is held jointly with other individuals, in which case it is only the bankrupt individual’s beneficial

interest, i.e. the bankrupt’s net share of the proceeds of sale, which vests in the trustee in bankruptcy.

The power to disclaim a lease only applies if that lease is ‘onerous property’. Onerous property is an unprofitable contract and such a contract is not unprofitable just because it is financially disadvantaged, or because a better deal could have been achieved. The key feature is that the performance of the obligations under the lease would prejudice the trustee’s obligation to realise the assets and distribute proceeds to creditors. Onerous property also includes any other property of the company or the bankrupt that is unsaleable or not readily saleable or is such that it may give rise to a liability to pay money or perform another onerous act.

Generally, liquidators will tend to look at the ongoing financial and other commitments under a lease, and whether the lease can be sold to an independent third party at arm’s length in the open market, at a premium. That

July 2020 •

premium could then be used for the benefit of the company’s or the bankrupt’s creditors.

If, for example, the insolvent care provider holds the property under a long lease, say 80 years, at a peppercorn or nominal ground rent of only a few hundred pounds per annum, then that lease would clearly have value in the open market, as it could be assigned, and a liquidator or trustee in bankruptcy may be far more reluctant to disclaim such an asset. However, some badly drafted long leases which could otherwise have a capital value, contain forfeiture provisions on liquidation/bankruptcy. Such provisions are considered serious lease defects since they allow a landlord to forfeit the lease and acquire a windfall in the case of liquidation or bankruptcy. For example, if a landlord had sold a 90-year lease to a care home operator at nil rent for, say, £1m, but the lease contains a forfeiture provision on bankruptcy/liquidation, then that liquidation or bankruptcy occurring, to


©Vitalii Vodolazskyi -

Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48