Tenant breathes (brief) sigh of relief following forfeiture of its long lease

Tenant breathes (brief) sigh of relief following forfeiture of its long lease

Tenant breathes (brief) sigh of relief following forfeiture of its long lease

The Court has granted insolvent former British Home Stores (BHS) chain relief from forfeiture on the condition that it completes an assignment of its long lease by no later than 28th June 2019.  At a time when the retail industry is seeing a number of high profile closures, this case will be of interest to both landlords and tenants as well as insolvency practitioners.

In 1998, British Home Stores (BHS) took a lease of shop premises at a shopping mall in Bristol for a term of 125 years at a premium of £7 million and at a peppercorn rent. The lease contained a ‘keep open’ covenant to maintain trade at the store and a landlord’s right to forfeit (terminate) in the event of a breach of covenant.     

The issue

In 2016, BHS ceased to trade and went into liquidation, changing its name to SHB Realisations Limited (SHB). Following failed attempts over a period of two years to market the lease and permanent closure of the shop, SHB were found to be in breach of the ‘keep open’ covenant and the landlord served a notice to forfeit under s146 of the Law of Property Act 1925. In seeking relief from the Court, SHB and its lender, GB Europe Management Services Limited (GB), asked for more time to complete an assignment.  The landlord counter-claimed for possession and mesne profits.

Decision

The Court held that although the breach was incurable, and would continue to be incurable until an assignee was found and the store opened for business, SHB was granted relief from forfeiture until 28 June 2019 to allow it time to find a buyer, failing which the lease would be forfeit.

Reasoning

SHB and GB felt that refusing relief would grant the landlord a material windfall with the leasehold valued in the region of £65 million, whilst GB would, as the lender, suffer a major loss. 

In weighing up the parties’ respective interests, on the one hand the Court sympathised with the landlord’s view that there was no market for the lease anyway and so there would be little if anything lost by SHB or GB if relief was refused.  Also, the empty unit was having a negative impact on the landlord in a mall where the fourth largest store continued to be boarded up.

On the other hand, whilst there had only been a ‘passing interest’ in the lease, the Court agreed that there was still a prospect of finding an assignee and so SHB should not be deprived of the opportunity to reduce its debts and GB should not be deprived of its security.

For that reason, whilst the potential windfall to the landlord was of some relevance, the Court decided to grant relief on a conditional basis only, giving SHB three months to assign the lease failing which the lease would be forfeit.

Practice Point

The Court will exercise its discretion when deciding whether to grant relief.  In this case the Court illustrated that where a breach of covenant is irremediable, and the landlord is suffering ongoing damage, strict conditions, particularly time limits will be imposed on a tenant seeking relief from forfeiture.

The case also shows that a long lease (even one granted at a significant premium) can be forfeited in the event of a persistent breach of covenant, even where the consequence would be a loss to the tenant and a potential windfall to the landlord. 

A tenant may, however, even in today’s particularly weak retail market, still be able to convince a Court that it should be given one final opportunity to resolve the issue before the lease is forfeited, although in BHS’s case, where its deadline to find a buyer expires tomorrow, it would appear that three months was not long enough.

The case: SHB Realisations Limited and GB Europe Management Services Limited v Cribbs Mall Nominee (1) Limited and Cribbs Mall Nominee (2) Limited

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