Jonathan Jeffries on rent issues for commercial premises

Jonathan Jeffries is a partner in the corporate recovery group at Pinsent Curtis.

The House of Lords has turned the tables on landlords of commercial premises who charge tenants high rents. The recent Park Air Service case gives commercial tenants the ability to avoid over-rented premises through disclaimers in liquidations, whether solvent or insolvent.

The case involved the tenant renting premises with a market value of £35,000 at £160,000. It was a members solvent liquidation with assets of £6.7m. Even with the landlord's full claim of £5.3m there would have been a surplus. The amounts involved justified this as a test case all the way to the House of Lords.

The Lords effectively saved the tenant £1.5m because they decided that the landlord's claim was calculated by taking the rent and other payment due under the lease to the end of its term and then deducting from that an estimate of the actual rent the landlords could receive after disclaimer from another tenant renting at the then market rent.

The landlord's claim was further discounted to allow for advancement, which in this case was an 8.5 per cent discount (being the yield on gilt-edged securities for an equivalent term).

While this seems complex it is really a simple calculation which most professional valuers are familiar with. Previously landlords had always adopted a bullish approach insisting that the tenant had to pay under the terms of the lease until the end of the term with no discount. This meant the landlord was always in control.

Now Park Air Service has shifted the balance of power back to tenants. Tenants who are reconstructing groups of companies now have some leverage to persuade difficult landlords to accept a surrender. The liquidator of any tenant can disclaim and the landlord's claim is almost pre-determined by the calculation/formula.

Tenants can assess the cost of lease termination in any liquidation. The principles are also applicable to any income stream – for example, leases on assets and hire purchase agreements.

A subsidiary point from the case is that peaceable re-entry by a landlord in a lease is not enforcing security. Therefore,when faced with an Administration Order under the Insolvency Act 1986, if entry can be obtained peaceably the landlord will get the property back. Administrators may seek to avoid this by having 24-hour security on site at all times.