Administrations – Delivering Leaseholds to Purchasers
Lessons for Administrators from the SSRL Realisations Ltd. Case (Sept 2015)
“This case demonstrates the need for Administrators to closely monitor lease assignment negotiations post sale and to take pro-active action to deliver value should assignment negotiations fail”
Phil Reynolds, Deloitte Restructuring Director
How to deliver leaseholds to a Purchaser - the SSRL Realisations Ltd (“SSRL”) case - September 2015.
This case involved a landlord seeking forfeiture of a lease held by SSRL, a tenant in administration, and raises the key question about how an Administrator should go about realising and delivering value from leasehold assets.
SSRL entered into Administration on 29 September 2014 and the Administrators (from AlixPartners) sold SSRL’s leasehold interests including a lease at the Brunswick centre that was the subject of the forfeiture action.
The sale was, as is practice, supported by a Licence to Occupy being granted to Strada Trading Limited (“STL”) whilst the Administrators applied for formal consent to the assignment of the lease or in the alternative, to accept a surrender of the lease for an agreed premium.
The lease in question contained a pre-emption provision, enabling the landlord to buy in the lease by matching any bona fide premium offer obtained. The Administrators contended that the premium obtainable as a result of the proposed assignment was c.£1.4m.
The landlord contested the arrangement and raised the following arguments:
- The application to assign was not valid as it did not comply with the lease pre-emption requirements.
- The proposed assignee was a “Newco” and did not have sufficient financial standing.
- No Authorised Guarantee Agreement had been offered.
- The Landlord had been prejudiced because there were alternative third parties with good covenant strength interested in the lease.
- The key test under Atlantic Computers had been passed - thus any prejudice to the creditors as a whole from the forfeiture action was justified.
Following a period of failed negotiation, the landlord submitted a court application for forfeiture in June 2015. The key point of contention was the provable level of any premium that could be obtained from a bona fide assignee of the lease and, as a consequence, the financial harm to the insolvent estate, if the lease was forfeited.
The Administrators, who only commenced open marketing of the lease in June 2015, secured two potential offers for the lease thereby showing that the assignment of the lease would have value to the insolvent estate. However, the landlord maintained that these 2 late offers were not capable of being executed so forfeiture should be granted.
The Judge confirmed that the practice of granting licences to occupy was fully in keeping with the purposes of the administration notwithstanding any technical breach of the lease alienation provisions, which is the common mechanic followed in such sales.
The Judge also confirmed that the Administrators had properly and legitimately sought to complete an assignment to STL. On this basis, following the principles of Atlantic Computers any application by a landlord to forfeit should be refused.
However, the deemed consideration for a successful assignment to STL of c.£1.4m was not proven to represent open market value and the financial standing of STL as an assignee also raised concerns.
The key issue for the Judge was whether there was any proven value in the lease. The first offer obtained by the administrators was from a party involved in the wider group restructuring with a similar lack of financial standing and was discounted on the same grounds as the STL offer.
The alternative offer was capable of satisfying the landlord’s financial and other objections but the premium offered was conditional on securing rights to an external seating area (which was not part of the lease). As the landlord had made it clear that such seating rights would not be granted, this offer was also not capable of completion.
On the balance of evidence presented, the Judge determined that no other third party would likely pay a premium for the lease and even if they did, the premium would be immaterial given the overall level of secured indebtedness (£11m) and that forfeiture would not, therefore, be detrimental to the administration.
The Judge gave permission to forfeit and permission was also granted to allow forfeiture by peaceable re-entry, thereby requiring the tenant to commence separate legal proceedings to resist.
Lessons for Administrators and Purchasers
- Act early to market premises and obtain provable evidence of open market value of a lease on an arms length basis.
- Involve real estate expertise at the earliest opportunity and run a marketing programme in parallel with any sale of business process.
- Monitor negotiations between lessees and landlords closely throughout the administration process and propose alternative assignee solutions as early as possible.
- With regard to leasehold interests, ensure premium offers contain as little conditionality as possible and any such conditions are deliverable.
- When securing offers of premiums, demonstrate that the offers obtained will be material to the level of creditor deficit
- Take care when altering rent payment terms. The cash flow advantage of deferral arrangements should be weighed against the risk of forfeiture.
“This case underlines the importance of involving real estate expertise at the earliest opportunity - so a marketing programme can be run in parallel with any sale of business process”.