Insolvent tenants can be a major headache for landlords.

For example, when a corporate tenant goes into administration, the landlord needs to obtain the consent of the administrator, or of the court, to forfeit the lease. This is because administration is intended to provide a moratorium period during which action cannot be taken against the insolvent business while an attempt is made to make it viable or to sell it as a going concern.

Therefore, when a landlord goes to court to recover possession of the let property by forfeiting the lease, the court must balance the interests of the landlord with those of the creditors of the company in administration.

In a recent case, a landlord wished to recover a lease from a tenant company in administration. The tenant’s business had been transferred to a newly formed company under a ‘pre-pack’ arrangement and the new company was occupying the premises.

The landlord had found what it considered to be a better tenant and refused to accept an application to assign the lease to the new company. The landlord then applied to the court to forfeit the lease.

The new company opposed the application. However, the court ruled in favour of the landlord: once the company in administration had been sold to the new company, the purpose of the administration had been served and there was no longer a need to balance the interests of the landlord and those of the creditors of the insolvent company.

This ruling has implications for landlords fortunate enough to find a ‘better’ tenant when a tenant in administration is sold to a new owner and should also be borne in mind by tenants considering a pre-pack.