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Closing the doors on landlords
24 April 2009
In the ongoing Chartbusters examinership case, the repudiation of lease agreements for some of the group’s stores has shone the spotlight on how landlords are being treated in examinerships.
In a recent High Court hearing, Mr Justice John Edwards granted Chartbusters’ application to repudiate the leases on six premises. As a result, it is understood that the landlords’ damages claims for lost future rent will be covered in examiner Neil Hughes’ scheme of arrangement for the group.
As is the norm in examinership cases, landlords will be classed as unsecured creditors and the dividend for this class is expected to be low.
Experts expect several similar applications in the coming months, as struggling retailers attempt to walk away from underperforming outlets.
So where does that leave property owners? David Baxter, head of A&L Goodbody’s Restructuring and Insolvency Group, insists that the law in this area is not all stacked against landlords.
“There’s a balance. As a landlord, you do have some protection in an examinership. The examiner of a corporate tenant can’t unilaterally vary the terms of a landlord’s lease by, for instance, lowering the rent level or inserting a break clause,” he says.
Nor can the examiner’s scheme of arrangement cancel the landlord’s right to forfeit a lease or re-enter the property in the event of non-payment of rent post-examinership.
Baxter accepts that the Chartbusters case illustrates that repudiation of leases will occur in examinerships but he argues that this isn’t a clear-cut precedent.
“I’m not aware of any lease repudiation application that has been contested in an examinership – that is, where the landlord has challenged the proposed repudiation of the lease.”
Rather than contest a repudiation application in the courts, landlords may accept a repudiation on the basis that their damages claim is admitted within the examiner’s scheme.
Baxter explains the typical sequence of events. “Suppose a landlord has a lease with an annual rental of €500,000, with six years to run before a break, and the tenant goes into examinership. After obtaining advice, the landlord concludes it is vulnerable to a repudiation application on the basis that the tenant’s survival is enhanced by the termination of that lease.
“If the landlord believes he will not be able to successfully oppose the repudiation application, then, typically, the landlord will seek to have a claim covering its loss admitted in the examinership.
“The landlord may initially look for the full €3 million of lost future rent and perhaps also a sum for repairs. The examiner will consider the claim, apply discounts – for example, the likelihood of the landlord attracting a new tenant – and will counter with a lower figure.
“Normally a figure would be agreed for the landlord’s claim. And as an unsecured creditor, the landlord might expect to get something like 10 cents in the euro as a dividend on this claim.”
So why don’t landlords refuse to budge, resist any attempts to negotiate their claims and take their chances in court? Baxter believes that, in certain cases, a landlord will do just that. However, there are two risks associated with this strategy.
“Firstly, the High Court may well repudiate the lease anyway if it believes that, by doing so, the prospects of a successful restructuring within the examinership are improved.
“Secondly, if the landlord succeeds in resisting the repudiation application, ultimately that victory will be somewhat pyrrhic if the consequence is that the examiner concludes that the examinership will not deliver a successful restructuring.
“A failed examinership will see the company placed into liquidation or receivership. In either scenario, the position for the landlord is probably even bleaker than in the examinership.”
On a brighter note for property owners, the scheme of arrangement in an examinership case doesn’t affect any third-party personal guarantees that the landlord has in place. Once the examinership process has concluded, the landlord may be able to turn to a guarantor to reclaim any losses incurred.
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