When can a business lease be forfeited for a tenant’s insolvency in England & Wales? – Lexology
Forfeiture and Insolvency Clauses in Commercial Leases – Clarity from the High Court
SBP 2 SARL v 2 Southbank Tenant Limited [2025] EWHC 16 (Ch)
Background and Context
Forfeiture clauses are a standard feature in most commercial leases, offering landlords the right to terminate the lease upon certain tenant defaults. These typically include non-payment of rent or breach of tenant covenants. A recent High Court ruling has clarified the application of forfeiture where the clause is triggered by a tenant’s or guarantor’s insolvency, specifically, their inability to pay debts as defined under sections 122 and 123 of the Insolvency Act 1986 (IA 1986).
The judgment confirms that forfeiture based on insolvency only becomes enforceable once a tenant’s or guarantor’s financial inability has been proven to the satisfaction of the court. Mere suspicion or allegation is not enough.
The Dispute
The case arose from the landlord’s attempt to forfeit leases on London commercial premises, citing insolvency of the tenant’s guarantor following a US corporate restructuring. The leases contained a right of re-entry if the tenant or guarantor was unable or deemed unable to pay its debts under the IA 1986.
The landlord commenced forfeiture proceedings, alleging the guarantor fell within the statutory definition of insolvency. The tenant, in response, sought to strike out the claims on the basis that no such insolvency had been proven in court at the time the landlord served its section 146 notice.
What Did the Court Decide?
The High Court sided with the tenant and struck out the landlord’s claim. The judge held that the insolvency condition in the lease had not yet crystallised: the guarantor’s financial position had not been formally adjudicated. As such, the landlord could not yet rely on that ground for forfeiture. Until such a determination is made-whether through insolvency proceedings or a court judgment-the landlord’s right of re-entry remains dormant.
Why This Matters
This decision has significant implications for commercial landlords and tenants alike:
- Common lease wording under scrutiny: Many commercial leases use similar clauses tied to insolvency definitions under the IA 1986. This ruling confirms that landlords must wait for a formal finding of insolvency before attempting forfeiture.
- Proof, not presumption: It is not enough for a landlord to assert that a tenant or guarantor is insolvent. Without a court ruling, the right of re-entry does not arise.
- Costs and strategy: Landlords may now need to initiate or await separate insolvency proceedings before seeking to forfeit on this basis-an approach that could be time-consuming and costly.
- Practical workaround: In some situations, landlords may find it more effective to rely on insolvency determinations arising from third-party proceedings, such as a creditor’s winding-up petition, rather than pursuing their own litigation.
Conclusion
The judgment makes clear that landlords can only end a lease due to insolvency if there are proven and legally confirmed facts. Landlords should be cautious when using lease terms about financial trouble. On the other hand, tenants and their advisers are better protected from early or uncertain attempts to end a lease.
If you wish to discuss any of the above, please contact our Dispute Resolution Team below or call us on 01702 338338.
