Retail surgery: Renewing leases when a landlord goes into administration

Many property-owning companies are struggling as falling capital values result in breaches of loan-to-value covenants. So retailers with large leasehold portfolios and many landlords may well experience one or more of them going into administration in the coming months.

This was the case for Somerfield, when the retailer was pursuing a lease renewal that the landlord opposed as it wanted to redevelop the site, and then went into administration before a decision on the renewal was made.

Freshfields Bruckhaus Deringer senior associate Margaret Rhodes explains that the court case considered the effects of the landlord’s administration on the tenant’s application for a lease renewal.

She explains: “The judge found in Somerfield’s favour and gave leave for the Landlord and Tenant Act 1954 proceedings to be heard despite the administration. The judgement contained conclusions that might help other retailers in similar situations.”

Rhodes continues that delaying the proceedings would not achieve a better result for the landlord’s creditors a whole. The judge concluded that the landlord should not be put in a better position by virtue of the administration. He also held that Somerfield had a right to have its 1954 Act application heard without delay as it would be wrong for a retail tenant to be left in a state of uncertainty in relation to its store.

She concludes that the case should “give some comfort to retailers faced with the problem of renewing leases when the landlord is in administration.”