Forfeiture

In her article, Sarah Thompson-Copsey examines the legal nuances behind triggering the right to forfeit for insolvency. She explores how a landlord’s forfeiture right under the Insolvency Act 1986 is only activated once a court formally determines a tenant’s insolvency, setting out the implications of this judicial requirement.

Case Name, Reference and Bailii Link

Summary

The High Court has determined that reference to ss122 & 123 of the Insolvency Act 1986 in a forfeiture clause requires a court determination that the tenant company is insolvent before the landlord is able to exercise its right of re-entry. As no determination had been made, the landlord’s attempt to forfeit was unlawful. 

Facts

This case concerns a 20-year lease granted in January 2019, at a rent of £20m pa, of commercial premises (comprising 300,000 square feet over 17 floors) situated in a prime location opposite Waterloo Station in London. The tenant is an SPV company which formed part of the WeWork global group of companies. The premises were used by the tenant as a serviced office building and were described as WeWork’s flagship location in the UK. 

Clause 6.1.2 of the lease contained a landlord’s forfeiture clause, allowing it to forfeit the lease in the event of the tenant or its guarantor “being unable to or deemed unable to pay its debts within the meaning of sections 122 or 123 of the [Insolvency Act 1986]”. 

From October 2019, the tenant’s obligations under the lease were guaranteed by a group company in the United States, WeWork Companies LLC (the LLC Company). 

• 6 November 2023, the LLC company was subject to corporate restructuring under Delaware law which divided the company into two corporate entities. The guaranteed obligations under this lease were allocated to the 2nd entity, but all of the LLC company’s assets were held by the 1st entity (which in turn guaranteed the 2nd entity’s guarantees). The 1st entity then filed for bankruptcy in the United States; 

• 20 December 2023, the landlord served a notice (Law of Property Act 1925, s146) on the tenant, alleging breach of lease; 

• 27 December 2023 the landlord issued possession proceedings (and served them the following day). 

Issues

The question before the court was whether the landlord had the right to forfeit.

Decision

The court held that the landlord’s right to forfeit had not arisen. Sections 123(1)(e) and 123(2) of the Insolvency Act 1986 state that for a company to be deemed unable to pay its debts, it must be “proved to the satisfaction of the court.” In other words, judicial determination is crucial in establishing insolvency. In this instance, it was the 1st corporate entity which had applied for bankruptcy and the 2nd entity (which had been allocated the guarantee for the lease) had not. 

The court ultimately agreed with the guarantor’s stance: without judicial determination establishing insolvency, there could be no breach entitling the landlord to forfeit the lease solely in reliance on these grounds. 

The court looked back to leading authorities on interpretation including Lord Hodge’s judgement in Wood v Capita Insurance Services Ltd [2017] UKSC 24, noting that: 

“The Lease is plainly a complex, formal contract which has been drafted by highly experienced solicitors on both sides [and includes a comprehensive] list of forfeiting events, in particular those arising in the context of the insolvency of the tenant or guarantor [to include] analogous US insolvency procedures as they may affect a tenant or guarantor incorporated in a US state, as WWC Inc. was and any replacement guarantor might likewise be. The clause, in short, appears to me to a bespoke adaptation of a long-developed precedent.” 

In short: 

• The language was clear: the forfeiting event would “naturally be read as the tenant’s or guarantor’s insolvency having been proved to the satisfaction of the court by some form of judicial determination” 

• The clause “provides a certain, clear and workable scheme, under which the right of forfeiture only arises upon and by reason of such judicial determination” which determination can be “in proceedings brought by a third party” 

Comments

Such provisions as found in this lease are not unusual. Those advising landlords may wish to consider whether more extensive “insolvency” trigger drafting would be more useful for a landlord.