Commercial landlords and insolvency: Know the terms of your lease

The recent High Court decision in Sbp S.A R.L. v 2 Southbank Tenant Ltd [2025] EWHC 16 (Ch) highlights the importance of paying particular attention to the wording of a forfeiture clause if you want to exercise your right to forfeit where a tenant or guarantor is in financial difficulty.

In this article, Laura Keegan, senior associate in our banking and restructuring team explains more.

Background to the case

Whilst the background facts are fairly complicated, the essential facts are that Company A gave a guarantee for various group entities to the Landlord. The leases themselves provided that, after various specific events occurring, or “the Tenant or the Guarantor being unable to or deemed unable to pay its debts within the meaning of sections 122 or 123 of the [Insolvency Act 1986]" the Landlord would be entitled to exercise its forfeiture rights. Company A underwent a restructuring, effectively splitting it into two entities: Surviving Company (SC) and Resulting Company (RC). SC filed for Chapter 11 Bankruptcy in the USA. The Landlord issued a forfeiture notice to SC. There was an argument within those proceedings as to whether the guaranteed liabilities had been transferred to SC or RC as part of the restructuring.

The Landlord issued a forfeiture notice stating that RC, as guarantor, was unable to pay its debts within the meaning of sections 122 and 123 of the 1986 Act.

How the wording of your lease can make or break forfeiture action

There were no formal insolvency proceedings against RC. RC defended the forfeiture action on the grounds that the wording within s 123(1)(e) and 123(2) of the Insolvency Act 1986, as incorporated into the lease, required a prior judicial determination of RC's insolvency before the Landlord could commence its forfeiture proceedings.

This is because both sections specifically state "it is proved to the satisfaction of the court" that the company is insolvent on either a balance sheet or cashflow basis. Whilst that usually happens at the winding-up petition hearing and is not a requirement for the presentation of a winding-up petition, the court must still be satisfied that the company is insolvent.

Why checking the terms of your forfeiture clause matters

In the case of RC, none of the specific events triggering the right to forfeiture within the insolvency clause had occurred (such as the presentation of a winding-up petition or resolution to place the company into a voluntary process). There had also been no prior judicial determination of whether RC was unable to pay its debts within the meaning of the 1986 Act.

As such, the Landlord had not been entitled to proceed with forfeiture on those grounds as the forfeiture clause provided for the right to arise only after insolvency had been proven to the satisfaction of the Court.

There is a strong argument that this case turned on its facts and there is scope for further argument on many of the points raised. It also emphasises the care that Landlords must take when looking at forfeiture proceedings where there is the potential insolvency of a tenant.

You must carefully check the terms of your lease, as formal insolvency proceedings may need to be in place before the right of forfeiture arises.

For more information on anything discussed in this article or on insolvency law in general, contact Laura using 0191 211 7970 or [email protected].