Forfeiture in Focus: An Insight into the 2025 High Court Decision in SBP 2 S.A.R.L v 2 Southbank Tenant Limited

Synopsis/Highlight:

The High Court [in England and Wales] have recently considered the reference to sections 122 and 123 of the Insolvency Act 1986, whereby the forfeiture clause could only become actionable if it was judicially determined by the court to allow the landlord a right of re-entry. This analogous position would likely apply in Northern Ireland and is something that commercial landlords should be astute to.

The Facts:

This case dealt with the consequences of a corporate restructuring of a group company in the United States, WeWork Companies LLC. This resulted in the company being split into two corporate entitles, whereby the company that had initially provided a guarantee for the lease of a commercial premises in London, became the second entity and no longer held any assets. The assets were transferred to the first corporate entity, which assumed responsibility for indemnifying the liabilities of the second entity.

Subsequently, the first company filed for bankruptcy in the US, and the claimant landlord (SBP 2 S.A.R.L) believed that due to this bankruptcy filing, the second entity would not be able to perform the guarantee. This resulted in the landlord serving a section 146 notice, to attempt to have the lease forfeited.

The Legal Framework:

The claimant landlord had provided a specific forfeiture clause within the lease that would reserve a right of re-entry to the landlord if a number of certain circumstances were to arise, namely, the non-payment of rent, a breach of tenant’s covenants or a breach of condition.

One potential breach of condition that should allow forfeiture was ‘the tenant or guarantor being unable to pay its debts within the meaning of sections 122 or 123 of the 1986 Act’. So how should sections 122 and 123 of the 1986 Act be interpreted? Section 122 provides that a company may be wound up if, under sub-paragraph (f), ‘the company is unable to pay its debts’. Section 123 of the 1986 Act provides further insight on the definition of the company’s inability to pay its debts, one of which being defined under section 123(e), ‘if it is proved to the satisfaction of the court that the company is unable to pay its debt as they fall due.’

The Result:

Upon the assumption that by the first entity filing for bankruptcy, they would therefore be unable to pay their debts as they fall due, one would assume that the breach of condition would be satisfied for forfeiture. However, due to the statutory language applied due to the incorporation of the Insolvency Act 1986 into the drafting of the lease, it can only be decided by judicial determination as to whether the entity would be unable to pay. As this had not been decided by the court as the time of the service of the section 146 notice, the claim for forfeiture of the lease was subsequently dismissed.

Conclusion:

This case stands as a pointed reminder to commercial landlords that the careful drafting of provisions in a lease plays a fundamental role in preserving their rights and can attempt to prevent any potential challenges that may arise when dealing with tenants that may be facing economic hardship.

Not only does this case serve as a reminder for careful drafting, it also reinforces the importance of aligning any statutory provisions that have been included in the drafting of the lease with the intentions of the parties involved.

For advice on the impact on the Scheme for charities or any other charity query, please contact Dearbhla Wilson or another member of our Real Estate team.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice.