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Insolvency

The Implications of Disclaimer

“Disclaimer”

  • A procedure by which a liquidator or trustee-in-bankruptcy, in winding-up an insolvent estate, can divest the estate of certain continuing obligations. It is not available to receivers or administrators.
  • It applies to “onerous property”, namely any unprofitable contract or other property which is unsaleable or not readily saleable or which may give rise to liability to pay money or do onerous acts. This will include most leases, depending on the particular circumstances.
  • A disclaimer must disclaim the whole of an interest.
  • Any person with an interest in property, in which a company in liquidation or bankrupt has an interest, may require the liquidator/ trustee to decide whether to disclaim the property in question by serving a “notice to elect”. A notice to elect gives the liquidator/ trustee 28 days to disclaim the property, after which he or she loses their ability to do so.


General implications of disclaimer for a landlord

A disclaimer terminates the rights, interests and liabilities of the debtor in relation to the property disclaimed as from the date of disclaimer. A person sustaining loss as a consequence of the disclaimer may claim for such loss in the bankruptcy or liquidation.

Disclaimer of a lease ends the tenant’s right to remain in the premises and the landlord may (but is not obliged to) retake possession by way of mitigation of loss. If the landlord does demand possession and re-enter this will affect his rights against others including, for example, any former tenant, guarantor or subtenant. A landlord in these circumstances must therefore act cautiously to preserve his rights against other parties.

Implications of disclaimer on a subtenant

Whilst the tenant’s interest in the premises is ended by the disclaimer, this does not affect the interests of other parties, including subtenants. A subtenant’s interest continues and, if it occupies the premises for business purposes, it may be entitled to claim the protection of the Landlord and Tenant Act 1954 against the landlord.

Case law suggests that, following disclaimer of the tenant’s lease, the subtenant holds the premises on the same terms and subject to the same rights and obligations as would be applicable if the tenant’s interest had continued, although the exact interaction between the headlease and sublease terms is unclear.

If the subtenant is reluctant to comply with the headlease covenants, the landlord may wish to take enforcement steps against the subtenant. It is not open to a subtenant to walk away (if the landlord does not forfeit), but it is unclear whether the landlord can directly enforce all of the covenants in the sublease.

Of course, once the situation arises, a landlord should try to negotiate with its subtenant to try to agree arrangements to regularise the relationship, possibly through the grant of a new lease.

Vesting Orders

If a lawful (i.e. authorised) subtenant wishes to remain in occupation of premises, it should comply with the obligations of the disclaimed lease and it can apply for that lease to be vested in it. Other parties can also apply for a vesting order, such as a mortgagee. In that event, the Court has discretion concerning to whom the vesting order should be granted, although a subtenant or mortgagee will generally be preferred, followed by a guarantor or former tenant and finally the landlord.

 

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