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In view of the current economic climate, with more large companies including public limited companies entering into various insolvency arrangements with creditors, it comes as no surprise that there have been numerous cases testing lease provisions in respect of their enforceability and the liability of tenants and guarantors.
In one recent case of Prudential Assurance Company Ltd and others v PRG Powerhouse Ltd and others, (“the Defendant”) entered into an arrangement with its creditors (“the Arrangement”), in view of the debts it had amassed with the marked exception of numerous landlords, (“the Landlords”) that it would close a number of loss making stores. It would then be released from its ongoing liabilities in respect of the closed stores and release the parent company as guarantor.
The arrangement only required a 75% majority approval, of the creditors which was obtained.
The court considered the Landlords application to revoke the Arrangement on the grounds that it unfairly prejudiced their interests. This is not permitted by the legislation.
Whilst it was accepted by the court that, in this case, the Landlords had been unfairly prejudiced within the meaning of the relevant statute, it was made clear that differential treatment of creditors is not in itself unfairly prejudicial and therefore, cannot be solely relied upon. The distinguishing feature in this case is the fact the Landlords had not only lost their claim against the Defendant, but also their claim against the guarantor, and the combined effect was the element which deemed the Arrangement unfairly prejudicial.
Considering the implications, this decision is sensible particularly in the current climate, as had a decision in favour of the Defendant been found and the arrangement not revoked, commercial landlords would need to reconsider the impact on current and future guarantor provisions in leases.
Had the court found in favour of the Defendant and the Arrangement not been deemed unfairly prejudicial, it could have seriously affected the security of commercial landlords in current and future lease arrangements.
This judgment has brought clarity to this issue and reaffirmed the value of parent company guarantees, bringing relief to the commercial property industry. However, landlords are urged to keep a close eye on their tenants' financial affairs particularly when any form of restructuring is proposed. They may also be best advised to look for alternatives to guarnatees.
Contact Us.
If you have any queries or questions about your business tenancy or any other property-related issue, please do not hesitate to contact Michael Pitt within our commercial property team on 0161 785 3500 or email:
michael.pitt@pearson-hinchliffe.co.uk.
Or click here to contact to a specialist property lawyer.
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