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Onerous Leases and Corporate Recovery

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Recent developments within this jurisdiction have provided more than a glimmer of hope for corporate entities continuing to struggle as a result of the recession that has decimated the Irish economy.    

Examinerships

Examinership is a process in Irish law whereby the protection of the Court is obtained to assist the survival of a company. It allows a company to restructure with the approval of the High Court.

Examinership is the now a potential bargaining chip when negotiating with stubborn landlords and the courts appear to be applying practical judgements in an attempt to save companies and jobs.

Linen Supply of Ireland Limited emerged from examinership in 2010 which led to 350 jobs being saved.  During the examinership, Linen Supply of Ireland Limited had sought permission to repudiate or cancel onerous leases held with several landlords.  While the High Court refused the company permission to do this, the Supreme Court subsequently ruled that leases are contracts within the meaning of examinership legislation and could therefore be repudiated.

The court’s decision was hugely important to companies in examinership, as the ability to repudiate leases could often mean the difference between survival and liquidation.

DIY store Atlantic Homecare exited examinership in September 2012 as landlords took a €5 million a year reduction in their rent.  The group proposed closing five stores when it entered examinership, but ultimately shut just two.  DIY chain B&Q Ireland exited examinership successfully in May 2013, saving over 600 jobs when the High Court approved an investment plan for the group.  The plan involved the closure of one outlet in Waterford and the restructuring of onerous leases at other stores.

Examinerships were successful in 75% of all cases concluded in the first half of 2013 and offer a viable cost effective option for fundamentally solid firms to successfully restructure in an attempt to help save their business and jobs. 

Upward only rent review ban

Legislation has prohibited upward only rent review clauses in all leases or agreements for lease entered into from 28 February 2010. Section 132 of the Land and Conveyancing Law Reform Act 2009 came into force on 28 February 2010 and provided that any clause allowing for the review of rent in a lease could be interpreted as permitting the upwards or downwards review of such rent, irrespective of the terms of such provision.  Section 132 applies to all commercial leases entered into on or after the 28 February 2010. 

The matter was recently considered in two High Court cases. The Court had to decide in both cases whether the pre February 2010 agreement could be deemed to be an agreement for lease.

In the first case, a guarantee attached to the pre February 2010 lease, required the guarantors, on the happening of certain circumstances, to accept a new lease at the same rents as were contained in the original lease (including the provision for upward only rent reviews).  On the happening of those specific circumstances, the guarantor did not take a new lease.

In attempting to quantify the landlord’s loss, the Court considered whether the guarantee amounted to an agreement for lease which was entered into prior to February 2010, in which case the prohibition on upward only rent reviews would not apply. The Court decided that no agreement for lease existed as an agreement for lease involves not only an obligation on the part of the prospective tenant to take the lease but an obligation on the prospective landlord to grant the lease.  In this case it was open to the landlord not to require the guarantor to take a new lease.

The decision endorsed the approach taken in Reox Holdings plc v David Cullen and Simon Davidson, in which the High Court held that where a guarantor steps into the shoes of a defaulting tenant and enters into a replacement lease after February 2010 on the same terms as the original lease, the restriction on upwards only rent reviews will apply to the replacement lease even where such original lease was entered into prior to February 2010. 

The second case concerned an option agreement entered into prior to February 2010 under which the landlord or tenant could call upon the other to enter into a 20 year lease on the expiration of an initial 5 year lease.  The landlord exercised this option after February 2010.  The Court considered all of the transaction documents which included a tenant option to acquire shares in the company which owned the property.  The Court concluded that from the outset there was a contractual pathway leading to the tenant continuing to possess the property after the 5 year lease.  This made it virtually impossible to deny that the option agreement was anything other than an agreement for lease.  As the option agreement was entered into prior to February 2010, the prohibition on upwards only rent review provisions did not apply.

In order to safeguard upward-only rent review provisions, landlords will naturally be keen to construe their pre 2010 agreements as agreements for lease.  Courts will examine all transaction documents in connection with the lease closely to determine whether an agreement for lease can be deemed to exist.  It would appear, however, that Courts will not construe the standard guarantee lease provisions, requiring a guarantor to take a lease on the occurrence of specified circumstances, as an agreement for lease.

The recent decisions are likely to be of interest to those bound by leases which contain upwards only rent review provisions, to guarantors generally and to new businesses seeking to rent commercial property.