Member Article

Background

The case relates to the insolvency of a women’s fashion retailer and their shops in Bristol and Leicester.

In 2010 the landlords entered into agreements to surrender and deeds of variation with the company in relation to the two shops. The agreements granted rent concessions and in return the company agreed to surrender the leases for a premium, payable by the company. The agreements entitled the landlords at any time to give the company not less than 6 months’ notice of the surrender completion date. The company deposited the amounts due on completion in escrow accounts with the landlords’ solicitors. On completion of the surrenders the landlords were to be entitled to the release of £540,000 of escrow money.

The purpose of the agreements was seemingly to allow the landlords’ time to find new tenants whilst avoiding empty rates for as long as possible.

The landlords served notice calling for the surrenders to be completed, but before completion the company went into administration.

The administrators refused to complete the surrenders on the basis that the £540,000 held in escrow should be released to the administrators for distribution to the company’s creditors.

At first instance the High Court found for the company and refused specific performance of the surrenders.

The landlords appealed.

Court of Appeal

The Court of Appeal found for the landlords and ordered specific performance.

The landlords had in principle been entitled to specific performance before the company went into administration and there was no reason to deny them an order afterwards.

When the money was placed with the landlord’s solicitors as stakeholders it ceased to be part of the company’s assets so the order should not be viewed as depriving the unsecured creditors of that money. In fact, if the court were to refuse an order for specific performance it would be preferring the interests of the creditors over those of the landlords, when there was no sound basis for doing so.

Commentary

The fact that the surrender premium was being held by the landlords’ solicitors as stakeholder seemingly protected the money on the basis that it was held outside the company’s estate, pursuant to, effectively, a tripartite contract between the relevant landlord, the company and the stakeholder.

The decision affords comfort to landlords that the mere fact that insolvency practitioners have been appointed, should not in itself entitle the insolvent company to avoid its contractual obligations regarding the disposal of an interest in land. It will also be interesting to see whether escrow accounts will be used more frequently to protect money against insolvency.