Disclaimer of Commercial Leases

Commercial Property Article

10 December, 2008

One of the effects of the current economic climate has been an increase in the number of tenants going into liquidation.

So what impact does this have for a commercial landlord?

Modern commercial leases usually allow the landlord to forfeit the lease if the tenant becomes insolvent but sometimes the landlord will want to keep the lease in place. In those situations landlords worry about whether the insolvent tenant can disclaim the lease - a unilateral step which brings the lease to an end.

Who can disclaim?

Only a liquidator or trustee in bankruptcy can disclaim a lease. So if the tenant is in administration, a receiver has been appointed or there is a voluntary arrangement there is no risk of disclaimer and the landlord has control over whether the lease comes to an end.

Effect of disclaimer - guarantors and former tenants

Disclaimer only ends the liability of the current tenant. Guarantors remain liable.

Often the terms of the guarantee will require a guarantor to take up a fresh lease if the landlord demands it and the guarantor's liability may come to an end if no demand is made. If the guarantor does not take up a fresh lease, but remains liable under the guarantee, the landlord must be careful to avoid taking back possession of the property as that will end the guarantor's obligations.

A former tenant may still be liable under the terms of the lease. If this is under an authorised guarantee agreement, then they will be treated in the same way as any other guarantor.

Landlord's claim against tenant

The landlord may have a damages claim against the tenant who has disclaimed, based on the rent payable until the end of the lease less the rent achieved on a new letting, plus dilapidations and other costs of re-letting. The landlord will have to prove in the liquidation/bankruptcy for the claim like any other unsecured creditor, so the claim is usually only worth bringing if there is going to be some cash for them.

If your tenant has gone into liquidation (or, if an individual, has become bankrupt) but shows no sign of disclaiming the lease, you may want to know where you stand. The landlord can serve a notice on the liquidator forcing him to decide whether or not to disclaim within 28 days. If the liquidator chooses not to disclaim in response to the notice, he cannot change his mind later. Although this would not make the liquidator personally liable for the rent under the lease, it strengthens the landlord's argument that the rent is an expense of the liquidation and therefore has priority over other claims.

Adam can be contacted on 01254 222399 or contact Adam Bromley by email.

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