Notice of Disclaimer advice
My tenant is in the process of being wound up, and I have just received a Notice of Disclaimer from its liquidator. What does it mean?
Under Section 178 of the Insolvency Act 1986 (as amended) the liquidator of a company can disclaim any “onerous property”. Onerous property is defined as an unprofitable contract, or any other property of the company which is not readily saleable or may give rise to a liability to pay money or perform any other onerous act. The liquidator’s power is exercisable even if they have taken possession of the onerous property, attempted to sell it, or otherwise exercised rights of ownership in relation to it.
The effect of a disclaimer is to discharge the company from all further rights, interests, and liabilities in the onerous property. This means that you will no longer receive sums due from your tenant under the terms of the lease, neither will you be able to enforce any of the other tenant covenants in it (such as repair, redecoration, and/or reinstatement obligations).
A disclaimer does not, however (except insofar as is necessary for the purposes of releasing the company from liability) affect the rights or liabilities of any other person. This means that any guarantor under the lease remains liable. In the unlikely event that the lease was entered into before 1 January 1996 any former tenant(s) will also remain on the hook, and we can advise you on how to go about making a claim.
Rather than simply meeting the tenant’s obligations under the lease, any guarantor (or former tenant) may wish to have the property back in hand, so that they can exercise a degree of control – perhaps to prevent the property from deteriorating, or to seek a potential assignee. In that scenario, an application may be made to court for a vesting order under Section 181(3) of the Insolvency Act, and a court may vest the disclaimed property in the applicant on such terms as it thinks fit (no formal assignment or transfer is required). With leasehold interests the vesting order will make the applicant subject to the same obligations and liabilities to which the company was subject at the commencement of the winding up.
Both you and/or any third party suffering a loss due to the disclaimer are/is entitled to prove for the loss in the tenant’s winding up, but bear in mind that the claim will normally be unsecured, so any meaningful recovery is unlikely.
Although not relevant to your particular circumstances, landlords should also be aware that, if their tenant is being wound up but the liquidator has not yet served a Notice of Disclaimer, then an application may be made to the liquidator requiring them to decide whether or not they will disclaim. The liquidator then has 28 days within which to serve a Notice of Disclaimer, failing which the lease may no longer be disclaimed and the tenant’s liabilities will continue.