Landlords' Right to effect peaceable re-entry against tenants in administration

United Kingdom

The relationship between Landlord and Tenant law and Insolvency law has proven to be a difficult one at times. One issue in particular, of significant practical importance, is whether a landlord is entitled to effect peaceable re-entry against a tenant in administration without first obtaining leave (from either the administrator or the court). There have been a number of contradictory High Court decisions on this point over the last eight years. Recent cases, however, demonstrate that a landlord is entitled to exercise this archaic but effective remedy against a tenant in administration without leave of the court. To many this ignores the purpose of the moratorium under the panoply of an administration order set up by section 11(3) of the Insolvency Act 1986 (the "1986 Act"). Set out below is how the High Court has come to this conclusion and some practical steps which can be taken by administrators faced with the possibility of a landlord peaceably re-entering property.

An Administration Order

The purpose of putting a company into administration is stated at section 8(3) of the 1986 Act:-

"(a) the survival of the company, and the whole or any part of its undertaking, as a going concern;...

(d) a more advantageous realisation of the company's assets than would be effected on a winding up"

Section 11(3) of the 1986 Act appears to be entirely consistent with these purposes. It states:-

"During the period for which an administration order is in force:-

(a) no resolution may be passed or order made for the winding up of the company;

(b) no administrative receiver of the company may be appointed;

(c)No other steps may be taken to enforce any security over the Company's property, or to repossess goods in the company's possession under any hire purchase agreement, except with the consent of the administrator or the leave of the court...; and

(d)No other proceedings and no execution or other legal process may be commenced or continued and no distress may be levied, against a company or its property except with the consent of the administrator or the leave of the court..."


The highlighted words have been the subject of the case law discussed below.

The Recent Cases

Two recent cases on this point: Clarence Cafe Ltd v Comchester Finance (unreported - 3rd November 1998) and Re Lomax Leisure Ltd (22nd April 1999 NLD), explored the arguments and all the previous authorities in some detail. Interestingly, the later case of Re Lomax Leisure Ltd did not consider the Clarence Cafe case and yet still came to the same conclusion.

The Issues Explored

HHJ Cooke in Clarence Cafe distilled the matter to the following two issues:

1.Whether peaceable re-entry is the enforcement of a "security" and is therefore caught by section 11(3)(c) of the 1986 Act (see above); and/or

2.Whether it is "other legal process" and is therefore caught by section 11(3)(d) of the 1986 Act (see above).

1.The Enforcement of "Security" Issue

The weight of authority supports the proposition that a right of re-entry contained in a lease is not "security" in the strict legal sense under the 1986 Act. Firstly, there is the case of Ezekiel v Orakpo [1977]
(1) in the Court of Appeal - although this was a case under the Bankruptcy Act 1914. Secondly, the case of Razzaq v Pala [1997] (2) a case dealing with the personal insolvency part of the 1986 Act.
In the Ezekiel case Shaw LJ referred to the judgment of Stirling J in the case of Howard v Fanshawe (1895) (3) and stated:

"Stirling J.... after citing other authorities said.... that they appeared to him 'to establish that the ground on which courts of equity formerly gave relief was that the proviso for re-entry was in the eye of the court simply a security for the rent.' In the light of the passages which precede it, the phrase, 'security for rent,' is not to be understood in the strict legal sense as something equivalent to a mortgage as security for a debt. It is rather a means of putting the lessee in the position that if he does not pay the rent he will risk losing his lease...."

In other words, the Court of Appeal rejected the proposition that a proviso for re-entry was a "security" in the strict legal sense. Could it, however, be "other security" and therefore come within the definition of "security" as defined in section 248 of the 1986 Act? This was rejected by Lightman J in the Razzaq case.(4)

In that case, Lightman J concluded on the authorities (including in particular the Ezekiel case) that the proviso for re-entry was not security in the strict legal sense. He then went on to decide whether, in the context of the scheme of the 1986 Act, it was the intention of Parliament to give the word "security" an extended meaning which would embrace rights of re-entry. He traced through the statute and sought to construe it consistently and came to the conclusion that such extended meaning could not be given, it being intended, in his view, that "security" should bear a technical meaning only. He reviewed the definition of "security" in sections 269 and 383 of the 1986 Act and then stated:

"I should add that materially similar considerations apply in respect of section 248 of the Act in case of corporate insolvency. Whilst a secured creditor may petition to wind up a company without being required to express willingness to give up his security, he must put a value on his security and only prove for the balance (see r.4.88 and 4.95 of the Insolvency Rules 1986). Again such a procedure is totally inapposite to a landlord's right to re-entry. The word 'security' in s.11(3)(c) of the Act therefore cannot include a landlord's right of re-entry. I am of the view that in March Estates v Gunmark I should have so stated and declined to follow the ratio decidendi of Exchange Travel Agency Ltd v Triton Property Trust plc [1991] BCC 341 and the obiter dicta in the other authorities to the contrary effect. It would appear that the dicta were uttered without full (if any) argument on the question and that in none of those cases, or indeed in Exchange Travel, was any reference made to the decision of the Court of Appeal in Ezekiel v Orakpo or the statutory provisions to which I have referred. In this case I have had the benefit of full and able argument...."
(5)

Lightman J concluded that he had got it wrong in a previous case (March Estates v Gunmark Ltd)(6) (a case dealing with voluntary arrangements under the 1986 Act) where he had concluded that the right to forfeit was a security for the purposes of section 4(3) of the 1986 Act.
In the Exchange Travelcase Harman J decided that a right of re-entry, although not "security" in the technical sense, was "security" for the purposes of section 11(3)(c) of the 1986 Act. However, the authority of this case was weakened, in the eyes of both HHJ Cooke and Neuberger J, by the fact that the Ezekiel case was not cited to the court.
In support of Exchange Travel, Doorbar v Alltime Securities Limited (No2) (7) (which dealt with an individual voluntary arrangement under the 1986 Act) decided that in the 1986 Act "security" should be given an extended meaning and thus include a proviso for re-entry. In the Doorbar case Knox J said "I consider that Alltime's right of re-entry under the lease should be regarded as a security which it holds over the debtor's property". When this case went to the Court of Appeal (8) Peter Gibson LJ said the following about Knox J's above conclusion:

"This is a conclusion with which I would not think it right for this court to interfere, the judge having taken into account all relevant circumstances".

Crucially, however, Lightman J resiled from his own view in the March Estates case the following year in the Razzaq case (see above) and unfortunately the Doorbar case did not consider Ezekiel.
Both HHJ Cooke in Clarence Cafe and Neuberger J in Re Lomax Leisure therefore had a head-on collision with authorities. They took the view that where there is a later decision which fully considers an earlier decision and differs from it, one ought to follow the later decision unless one is convinced that it is wrong. Both judges preferred the reasoning of Lightman J in the Razzaq case. In addition, in Re Lomax Leisure Neuberger J sought further comfort from the recent House of Lords case of Re Park Air Services plc (9) where Lord Millett said:

"The Court of Appeal regarded the landlord as a secured creditor. His security taking the form of a right to re-enter and recover possession for non-payment of rent and to distrain for unpaid rent... The short answer to this is that a landlord is not a secured creditor within the meaning of section 248 of the Insolvency Act 1986. Section 248 defines a secured creditor as a creditor of the company, who holds the security over the property of the company. A secured creditor who does not realise or voluntarily surrender his security, must put a value on his security and prove only for the balance as an unsecured creditor. None of these provisions is capable of applying to the landlord's right of re-entry. This is not a security interest subsisting in the tenant's property, nor is it capable of being realised by the landlord. It does not secure the performance of the tenant's liability to pay rent which remains unsatisfied, as well as after re-entry as before. It cannot be valued or surrendered."

Lord Millett states in clear terms that a landlord is not a secured creditor under section 248 of the 1986 Act which contradicts the basis upon which Harman J came to his conclusion on this point in Exchange Travel. This also contradicts Lord Millett's own support for Harman J's conclusion on this point in Re Olympia & York (Canary Wharf) Ltd". Again the authorities were not considered in Re Olympia & York and it was not the point in issue in this case.

2."Other Legal Process" issue

Harman J in the Exchange Travel case also concluded that the exercise of the right of re-entry, if not "security", was certainly the commencement of "other legal process" and was therefore covered by section 11(3)(d) of the 1986 Act (see above). However, as noted in Clarence Cafe and Re Olympia & York (10) (a case dealing directly with this point), the crucial authorities on this issue were not cited to Harman J.
Millett J (as he then was) reviewed the authorities on this issue in Re Olympia & York. The line of authorities began with Re Fanshaw & Yorston, ex p Birmingham and Staffordshire Gaslight Co [1871] (11). In that case, under the old bankruptcy regime, the court held that distress for rent was held not to be included within the definition of "legal process" because "no legal process whatever is necessary". Millett J rejected the conclusion, on this point, of Harman J in Exchange Travel and stated:

"In Stroud's Judicial Dictionary (5th edn, 1986) it is said that the word "process" is "the doing of something in a proceeding in a civil or criminal court and that which may be done without a court is not a process". Therefore a distraint, whether for rent or any other payment, and whether the right of distress be given by common law, statute, or as it should seem, by any other authority was not a "process" nor was it "an execution or other legal process" within the Bankruptcy Act 1869".

Millett J concludes that "other legal process" involved in some way something proceeding in or out of proceedings in court. Peaceable re-entry did not therefore come within this definition.
HHJ Cooke in the Clarence Cafe case agrees with the conclusion reached by Millett J. HHJ Cooke went on to consider what "other legal process" might have been intended to cover, if such self-help remedies as distress for rent and peaceable re-entry were excluded (it will be noted that distress is expressly included within section 11(3)(d) of the 1986 Act and HHJ Cooke considers this supports the view that the self-help remedies were intended to be excluded from the meaning of "other legal process"). He thought of two specific examples, being receivership by way of equitable execution and sequestration of a company's assets for a breach of an order.
In Re Lomax Leisure Neuberger J agrees with the conclusions of Millett J in Re Olympia & York.

Conclusion

It appears to be settled law, at least below the level of the Court of Appeal, that a landlord is entitled to effect peaceable re-entry in the context of an administration without requiring leave of the court or the consent of the administrator. The two reasons for this are that (a) a proviso for re-entry contained in a lease does not fall within the definition of "security" for the purposes of the 1986 Act; and (b) the meaning of "other legal process" contained in section 11(3)(d) of the 1986 Act (and in other parts of the 1986 Act) does not cover peaceable re-entry by a landlord under a lease.
It is interesting to note that whilst the judgements in both Clarence Cafe and Re Lomax Leisure appear to be sound and reviewed the authorities in some detail, there appeared a certain amount of reticence at reaching the decisions in each case. The root of this would appear to lie with the fact that a court has inherently disliked the self-help remedy of peaceable re-entry exercised by a landlord and yet this can be exercised freely against a tenant company in administration (or a company in liquidation) but the landlord would need consent of the court to commence court proceedings for forfeiture. It also appears to conflict with the notion of the moratorium imposed by an administration order. Neuberger J said in the Re Lomax Leisure case:

"In all these circumstances, with some regret, I have come to the conclusion that the forfeiture in the present case, effected as it was by peaceable re-entry, was effective."

It is left to a superior court or Parliament to change the law as it presently stands.

Some Practical Considerations for Administrators

If an administrator is faced with a landlord peaceably re-entering premises then, assuming he is dealing sensibly with the breaches complained of, it is likely a court will grant an injunction to get back into possession and obtain temporary relief from forfeiture (probably on condition that any arrears of rent etc. are repaid). There is therefore an immediate remedy for the administrator albeit having to call upon the assistance of the courts. Under the new Civil Procedure Rules there is a new drive to avoid litigation. Therefore if the administrator plays his cards correctly he may be able to set up a position such that if the landlord does peaceably re-enter and the administrator is then forced to seek an injunction to regain possession and temporary relief from forfeiture, then the landlord may have to pick up the legal bill.
If an administrator is faced with a landlord who has the ability to peaceably re-enter the following matters should be considered:

  • attempt to remedy any breach of covenant giving rise to the right to forfeit - ie pay rent etc. This may not be possible if the right arises as a result of the company going into administration. At least, enter into open correspondence with the landlord about how any breaches should or can be dealt with.
  • post a 24 hour presence at the premises to prevent a peaceable re-entry. This may be costly but where a tenant, for example, has a number of retail premises there may be a core of shops essential to the business where such action can be taken and the expense justified.
  • a landlord has to serve a section 146 notice under the Law of Property Act 1925 before he can peaceably re-enter in respect to any breach (except non-payment of rent or items reserved as rent). When such a notice is served, at that stage, consider issuing an immediate court application for relief from forfeiture to prevent a peaceable re-entry.
  • send a letter to the landlord requesting his written confirmation that he will not peaceably re-enter the premises but will only take court proceedings to forfeit, consent for which the administrator may wish to give as a quid pro quo. This letter should also put the landlord on notice that if he does peaceably re-enter, the administrator will immediately seek an injunction to regain possession and will seek an indemnity costs order from the court under the new Civil Procedure Rules. Such a letter should also deal with what the administrator is doing to remedy the breaches, his plans for the premises and what steps have been taken to date.

For further information please contact Richard Hanson on
+44 (0) 171 367 2903 or [email protected]


(1) 1 QB 260


(2) 1 WLR 1336


(3) 2 Ch 581


(4) And followed by HHJ Cooke in Clarence Cafe and Neuberger J in Re Lomax Leisure Ltd


(5) Lightman J appears to have overlooked the fact that he did refer to Ezekiel v. Orakpo in the March Estates case


(6) [1996] 2 BCLC 1


(1) [1995] BCC 728


(8) [1996] 1 WLR 456


(9) [1999] 1 All ER 673


(10) see [1993] BOLC 453 at p455e


(11) LR 11 Eq 615