Welcome to the first edition of RED Alert of 2025.
Also featuring in this month's update:
SBP 2 SARL v 2 Southbank Tenant Limited [2025] EWHC 16 (Ch)
Summary
In a case which will be of great interest to commercial landlords, the High Court recently was asked to consider whether reference to section 122 and 123 of the Insolvency Act 1986 in a forfeiture clause required a court determination that the tenant company was insolvent before the landlord was able to exercise its right of re-entry.
Facts
This case concerned a twenty-year lease of a commercial premises in central London and related to two forfeiture claims brought by the claimant landlord. The defendant tenant was an SPV company which formed part of the WeWork global group of companies. The premises were used by the Defendant as a serviced office building and were described as WeWork's flagship location in the UK. From October 2019, the Defendant's obligations under the lease were guaranteed by a group company in the United States, WeWork Companies LLC (the LLC Company). However, in November 2023, the LLC Company was subject to a corporate restructuring pursuant to the Delaware limited Liability Company Act which divided the company into two corporate entities. As a result of this division, the guarantee obligations previously owed by the LLC Company across its global properties were divided between these two new entities. In particular, the guarantee obligations under the Lease were allocated to the second entity, however all of the LLC Company's assets were allocated to the first entity. The first entity in turn provided an indemnity for the second entity's liabilities.
As a result of this restructuring, when the first entity filed for bankruptcy in the United States on 6 November 2023, the Claimant landlord grew concerned that the second entity would no longer be in a position to perform the guarantee. It consequently took steps to forfeit the lease and re-enter the premises by serving a section 146 notice on 20 December 2023.
The relevant law
As with many commercial leases, the lease contained provisions for the landlord to forfeit and re-enter the premises in certain circumstances, specifically non-payment of rent, breaches of tenant covenants, or specific breaches of condition. One such breach involved the tenant or guarantor "being unable to or deemed unable to pay its debts within the meaning of sections 122 or 123 of the IA 1986." The lease explicitly defined 'the Act' as referring to IA 1986.
To understand the significance of this reference, it's important to understand the effect of sections 123(1)(e) and 123(2) of IA 1986. These sections outline that for a company to be deemed unable to pay its debts, it must be “proved to the satisfaction of the court.” In other words, judicial determination is crucial in establishing insolvency.
On 20 December 2023, this precise issue came under scrutiny when the landlord served the section 146 notice. The notice alleged that the guarantor breached lease conditions as it was unable or deemed unable to pay its debts as per sections 123(1)(e) or (2).
Decision
The tenant disputed the landlord's entitlement to re-enter the premises and instead argued that the guarantor had not in breach at the time that the section 146 notice was served. Central to this argument was that any determination regarding its inability to pay debts needed formal judicial confirmation as specified by IA1986’s statutory language. In this instance, it was the first corporate entity who had applied for bankruptcy and the second entity (who had been allocated the guarantee for the Lease) had not.
The court ultimately agreed with the guarantor's stance: without judicial determination establishing insolvency, there could be no breach entitling the landlord to forfeit the lease solely in reliance on these grounds.
Our comments
The insolvency and forfeiture provisions which were at the centre of this case are regularly found in commercial leases. This decision is therefore a stark reminder to commercial landlords of the importance of careful drafting to safeguard their interests and avoid any potential pitfalls in the future when faced with tenants in financial distress. It is also possible that this judgment will have wider ramifications regarding the use of statutory references within lease provisions and demonstrates that parties must satisfy themselves that the effect of these statutory provisions adequately aligns with their commercial intentions.
