Posted: 03/03/2025
The case of SBP 2 S.À.R.L v 2 Southbank Tenant Limited [2025] EWHC 16 (Ch) highlights the importance of careful drafting and robust legal advice when looking to forfeit a lease.
2 Southbank Tenant Limited is a WeWork company and the tenant in this claim. WeWork Companies LLC was a guarantor of the lease covenants. The guarantor company was essentially split following a restructuring under Delaware law, with the pre-split company referred to as the ‘dividing company’, and the two resulting corporate entities that emerged as the ‘surviving company’ and the ‘resulting company’. The ‘surviving company’ then filed a petition under chapter 11 of the United States Bankruptcy Code.
The landlord, SBP 2 S.À.R.L, then served two notices under section 146 of the Law of Property Act 1925 to forfeit the lease for a forfeiture event unrelated to payment of rent. This case relates to the second of those notices, which relied on a clause in the lease permitting forfeiture where the tenant or guarantor was found to be ‘unable to or deemed unable to pay its debts within the meaning of Sections 122 or 123’ of the Insolvency Act 1986. SBP 2 S.À.R.L believed the ‘resulting company’ was unable to pay its debts as it was a new company with no assets. Four working days later (over the Christmas period), SBP 2 S.À.R.L then filed proceedings to forfeit the lease.
2 Southbank Tenant Limited responded with an application to either strike out the claim, or for summary judgment, on the basis that:
In order to succeed, it needed to show that SBP 2 S.À.R.L had no real prospect of success with its claim for forfeiture.
Had the forfeiture provisions in the lease been triggered?
Section 123 of the Insolvency Act 1986 contains a definition of ‘inability to pay debts’ and is crucial to understanding the implications of the forfeiture provision relied upon by SBP 2 S.À.R.L. At section 123 (2), it states (emphasis added): ‘A company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.’
The court held that there had been no determination by a court as to the ‘resulting company’s’ solvency, and therefore this particular provision had not been triggered and the forfeiture was unlawful. SBP 2 S.À.R.L had no prospect of arguing otherwise at a trial and so summary judgment was granted in favour of 2 Southbank Tenant Limited.
Had sufficient time been given?
The court also looked at whether sufficient time was given between service of the section 146 notice, and issuing the claim.
For context, breaches of lease can either be remediable (capable of remedy) or irremediable (incapable of being remedied). There is currently no binding case law as to whether an insolvency related breach is remediable or irremediable.
Whether the breach is capable of being remedied is important when determining how much notice to give between serving a section 146 notice and filing a claim for forfeiture. Where a breach is remediable, a tenant must be given enough time to remedy the breach before a landlord has the right to forfeit. Where it is irremediable, a landlord must simply give enough time for the tenant to understand their legal position. These are both fact-specific.
There was also an argument that, as 2 Southbank Tenant Limited had stated it would not be remedying the breach, regardless of whether it was remediable or not, that a shorter time period would be sufficient.
The court held that it was highly likely that an insolvency related breach would be irremediable. However, it was unable to determine whether the four working days’ notice that had been given was sufficient even on this basis and therefore concluded that this was a triable matter, even if the section 146 notice had been lawful.
This is a useful reminder about careful drafting and the impact of a commonly used provision in both commercial and residential leases.
The case gives some guidance as to whether an insolvency act is an irremediable breach, although this is not a binding decision.
In addition, it is important to give sufficient time between serving a section 146 notice and filing a claim for forfeiture, in order to minimise any liability to a landlord.
Fundamentally, as it is common for forfeiture provisions to include the definition of being unable to pay debts from section 123 of the Insolvency Act 1986, if a landlord wants to forfeit for insolvency, it needs first to serve a statutory demand or get a winding up order made.
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