The insolvency of a tenant obviously marks the point at which creditors, including the landlord, cannot be paid, and trading must cease. For its part, the landlord, with its income stream cut off, may face potential financial problems, particularly if the acquisition of the property has been financed with a bank loan which requires ongoing rental income for its servicing.
In some cases, a consensual solution may be possible. Another business may take the premises in question, and the change of tenant may be able to be effected either by an assignment of the lease or by an agreed surrender of the lease and the grant of a new lease by the landlord to the new tenant. Any such solution will require negotiation between the landlord and the insolvency official dealing with the affairs of the insolvent tenant. In the case of a désastre (bankruptcy) this will be the Viscount whereas in the case of a winding up under the Companies (Jersey) Law 1991 it will be a liquidator.
Where the tenant is subject to insolvency proceedings outside Jersey, such as administration or liquidation, the foreign insolvency official will not be able to transact in Jersey without an order of recognition by the Royal Court under Article 49 of the Bankruptcy (Désastre) (Jersey) Law 1990 or under the common law principles of comity. Woolworths was a high profile case of the Royal Court recognising the authority of English administrators to dispose of Jersey property assets. Negotiations can take place prior to Royal Court recognition of the foreign insolvency official but no transaction can be concluded until recognition has been ordered.
If no such consensual solution can be found, there are two potential courses of action, namely: (a) cancellation; and, (b) disclaimer.
Commercial leases will typically provide for the landlord to be able to seek an order from the Royal Court cancelling the lease in various ‘default’ scenarios, which will usually include désastre, winding up and other insolvency situations, as well as simple failure to pay the rent due under the lease and other material breaches of covenant. The Royal Court has consistently made clear that cancellation is a remedy of last resort, which will not be ordered where the landlord can be adequately compensated for the tenant’s breach. However, where the ground for cancellation is the tenant’s insolvency, the Court would be unlikely to refuse cancellation, unless, perhaps, it considered that there was value in the lease which could be realised for the benefit of the insolvent tenant’s creditors.
Cancellation brings the term of a lease to an early end. One consequence of this, which a landlord should bear in mind, is that any guarantors of the tenant’s obligations will themselves be freed of ongoing contingent liability. A guarantor will not, however, be released from liability in respect of a demand which has already been made under the guarantee.
The effect of cancellation on any sub-leases should also be considered. The position under Jersey law is not free from all doubt, but the likely effect of the cancellation of a lease is that any sub-leases granted by the tenant will themselves come to an end. Sub-tenants could therefore be left with no contractual right to continue to occupy the sub-let premises and thus at a disadvantage in negotiations with the landlord. By the same token, however, the situation could be attractive to a sub-tenant whom the landlord wished to continue in occupation but who had alternative premises available and could exploit the circumstances to negotiate more favourable lease terms.
Disclaimer is the ability (conferred on the Viscount by the Bankruptcy (Désastre) (Jersey) Law 1990 and on liquidators by the Companies (Jersey) Law 1990) to repudiate an onerous contractual relationship. Repudiation of a lease brings the lease to an end, and releases the insolvent company from liability, but “except so far as is necessary for the purpose of releasing the company from liability” does not “affect the rights or liabilities of any other person”. What this means has not been considered by the Royal Court, but English case law on equivalent legislative provisions makes clear that where a lease is disclaimed, a guarantee will remain in place. The effect of the disclaimer of a lease upon any sub-lease granted out of that lease is less clear.
The insolvency of a business tenant can give rise to a host of difficulties and legal issues, to say nothing of the human cost in redundancies and other financial hardship. For all parties concerned, the importance of obtaining clear professional advice at an early stage cannot be overstated.