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Lease Assignments, Restructuring Plans and the Malign Impact of COVID-19

Commercial tenants who assign their leases may feel that they have washed their hands of the matter and are at little risk of further rent or other liabilities. In the context of the financial distress arising from the COVID-19 pandemic, however, a High Court ruling has shown that such confidence may be misplaced.

The case concerned a gym that was leased to a company for 25 years. Just two years into the term, the landlord licensed the tenant to assign the lease to another gym operator. Crucially, however, the tenant guaranteed the assignee’s performance under the terms of the lease, including its payment of rent, and indemnified the landlord against any non-performance.

As the pandemic struck, the financially stressed assignee entered into a restructuring plan that was approved by the High Court under Part 26A of the Companies Act 2006. The plan, amongst other things, released the assignee from any outstanding liabilities under the lease, including rent arrears. It also reduced rent payable by the assignee to zero during the duration of the plan.

The landlord’s response was to launch proceedings, seeking more than £140,000 from the tenant pursuant to its guarantee. That sum represented about three months’ worth of rent that would ordinarily have been paid by the assignee, plus expenses.

In resisting the claim, the tenant asserted that the effect of the plan was to rewrite the terms of the lease so as to release it from its liability to pay rent and other sums which, it asserted, had not fallen due.

Granting the landlord summary judgment, however, the Court ruled that the tenant had no viable defence to the claim. It found, amongst other things, that it was not correct to say that the plan had rewritten the lease. It merely altered the assignee’s liability under the lease by operation of law, leaving the tenant’s liabilities unaffected.

As between the landlord and the tenant, the lease remained valid and subsisting. Rent continued to fall due even if, by reason of the plan, it was not payable by the assignee. Nothing had happened that had the effect of releasing the tenant from its obligations as a third-party guarantor. The landlord was required to give credit for sums it received under the plan.

12 October 2022
Last Updated
31 October 2022