Legal update

landlord would be entitled on the apply to the Court for forfeiture of the lease. That would result in a very significant windfall for the landlord who could then either use the property for his own purposes or sell it on the open market.

Contrast the above situation, with a care home provider which occupies a care home on say a 25 year lease, at a full commercial, i.e. ‘rack’ rent of, for example, £150,000 per annum, with upwards only rent reviews every five years. That lease is likely to have little or no value - in terms of it being sold for a capital sum - in the open market. The only likely situation where it could be sold on in the open market might be where the care home is under rented, i.e. the rent reserved by the lease is less than ought to be payable in the open market. That does not happen very often but if, for example, the open market rent of the property is actually £200,000 per annum, then a buyer in the open market would probably pay quite a significant premium to enjoy the benefit for a few years - until the next rent review - of paying £50,000 per annum less per year in rent than the open market value for a similar unit. In that situation, a trustee in bankruptcy or liquidator may not wish to terminate the lease by disclaimer, as it could be sold on.

However, a well-drafted commercial rack rent lease will almost certainly contain a forfeiture clause on insolvency and bankruptcy, and therefore a landlord may decide to forfeit the lease - particularly if he feels that the open market rents have risen in the meantime - unless there is good reason why the landlord wants the lease of the property to be transferred to the prospective buyer.

Parties who are interested in a lease can put the liquidator or trustee in bankruptcy on notice and force him or her to decide whether to disclaim a lease. A liquidator or trustee in bankruptcy can disclaim an onerous lease at any time unless they have been served with a ‘notice to elect’ by a landlord or any other interested person. Such a notice to elect will require the trustee in bankruptcy or the liquidator to decide whether or not to disclaim the property and, once served with such a notice, the trustee in bankruptcy or liquidator must issue a notice of disclaimer within 28 days of the request, failing which he loses the ability to do so.

Disclaimers of leases can cause issues for third parties. The House of Lords has held that a disclaimer operates to bring the interests of the insolvent party to an end, but the rights of third parties such as


guarantors and original tenants remain as if the disclaimed lease continues to exist. So, an original tenant may have a liability to the landlord to pay the rent and perform other covenants under the lease. There is a different treatment between a lease granted before 1 January 1996 - an old lease - and after that date - a new lease. With an old lease, the original tenant’s liability and that of any guarantor is unaffected by a disclaimer of an assigned old lease. The original tenant and the guarantor remain liable for outstanding rent and past breaches of covenant as well for future rent and other obligations, until the disclaimed lease expires or brought to an end. If the disclaimed lease is a new lease then, subject to conditions, the original tenant and the guarantor are released from liability on assignment of the new lease apart from where the lease has been assigned pursuant to an ‘excluded assignment’. That is usually an assignment of the lease where there has been a breach of the lease covenant. The next question to ask is what is the effect of a disclaimer on the current tenant’s guarantor where, for example, the tenant’s obligations were guaranteed by one of the directors personally? The guarantor of such an insolvent company which was a tenant is unaffected by a disclaimer and remains liable for any outstanding rent and past obligations as well as for future rent and compliance with the disclaimed lease covenants. That continues until the lease has expired or is determined. Also, if a party has given a guarantee under an authorised guarantee agreement to the landlord, then that liability continues notwithstanding any disclaimer of the lease.

There may also be situations where residents in a care home occupy individual rooms or care suites not under licence arrangements - which create purely personal contractual rights to occupy a room - but rather under separate tenancy agreements. Tenancies of this type are usually assured shorthold tenancies. The residents’ rights and obligations to the insolvent tenant care home operator are brought to an end on disclaimer of the headlease, but the residents’ interest in the property is not brought to an end as their tenancies remain in existence so far as is necessary to support the residents’ right to remain in occupation.

The residents can remain in

possession of their rooms for the term of their tenancies, provided that they

comply with the covenants in the head lease including payment of the head lease rent ie not the rent under the tenancy agreements, but the rents payable by the care home operator to the landlord. That is potentially a very messy situation.

Where residents occupy premises under a licence rather than a tenancy, then the effect of a disclaimer is that a purely contractual licence would probably be brought to an end by the disclaimer, leaving the residents with no rights to remain in occupation. In such a situation, the landlord would need to sign new licence agreements with the residents for them to have a legal right to occupy, otherwise the residents are trespassers.

This is a complicated area of the law, and any operator which holds a lease and which is considering an insolvency situation, or any landlord of a care home who is aware of the tenant’s prospective insolvency should take professional advice at an early stage.


Tom Lumsden

Tom Lumsden is a partner at CooperBurnett LLP in Tunbridge Wells, specialising in commercial property. He has particular expertise in the sale and purchase of care homes, including acquiring land for care home development.

Disclaimer: this article is not intended as legal advice and must not be relied upon as such • July 2020

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