Business leases and the assign­ment rules in restruc­turing

Many lessors choose to depart from a lessee’s right to assignment under section 55 of the Business Leases Act when entering into a business lease with new lessees. However, it is important to note that if a lessee becomes insolvent and is no longer able to pay its debts, the lessor may have to accept that a new lessee takes over the premises. This applies even if the lessor has done everything possible to limit the possibility of assignment in the business lease.

Restructuring and assignment

Assignment may take place in connection with restructuring where the business lease with the original lessee is assigned as part of a transfer of the distressed lessee company in accordance with section 14 c of the Bankruptcy Act.

This is a statutory, compulsory change of debtor. Therefore, the lessor is generally not able to oppose that the restructuring administrator enters into an agreement to assign the premises to a new lessee in connection with with a restructuring of the original lessee company. The rule is mandatory, and no derogations from the rule are allowed in the business lease.

The restructuring rules also imply that this type of business transfer may take place within very few days. The lessor must therefore accept that a new lessee may suddenly have taken over the lease, and the lessor may not be interested in leasing the premises to that lessee.

The new lessee will be inserted in the lease in the same way as the original lessee. The lessor should therefore be aware that a business lease with particularly favourable terms for the lessee, e.g. due to good cooperative relations, may be taken over by a random lessee if the original lessee becomes subject to restructuring proceedings.

Even in situations where the lessee appears to have a sound economy, the lessor should be aware of these rules as external matters may quickly reverse the situation, which we have witnessed during the COVID 19 crisis.

Avoid that a random lessee takes over the premises via termination for convenience or cause in due time
Assignment of the business lease as part of a business transfer in restructuring will require that the restructuring administrator has already decided to continue the business lease in accordance with section 120 of the Bankruptcy Act.

If the lease is terminated in accordance with its provisions and before the restructuring is initiated, it may therefore prevent assignment of the premises.

Assignment may also be avoided by terminating the lease if this is done more than four weeks before the restructuring is initiated. It is therefore important that the lessor is aware of any signs of problems with the lessee.

Therefore, the lessor must take into account whether the lessor’s attempts to help the lessee by e.g. not terminating the lease (granting a respite) will be sufficient to ensure the lessee’s survival. If the lessee, despite the lessor’s respite or the like, still becomes subject to restructuring proceedings, the lessor will be prevented from terminating the lease and thereby avoiding the compulsory assignment.

If the lessor has made plans to terminate the lease, e.g. by evicting the original lessee from the premises or by having entered into an agreement with a new lessee, this will also prevent continuation of the lease, whether it might have occurred less than four weeks before the restructuring was initiated.
In addition, a termination of the lease may be upheld if the breach having caused he termination is due to other matters than the initiation of the restructuring and/or the lessee’ failure to pay rent.

However, if it is not possible for the lessor to terminate the lease despite arrears prior to the initiation of the restructuring, a deposit, if any, may be spent on covering the arrears. The new lessee may also be required to restore the deposit according to the terms of the new lease.
If the deposit is not restored, the lessor may terminate the lease according to the general rules of the law of obligations.

Other possibilities of avoiding assignment

Under section 14 c of the Bankruptcy Act, the “nature of the agreement” may imply that a business lease may not be assigned.

If the lessee’s performance of a lease requires special competencies, e.g. goodwill, access to key employees, special IPR or other assets which a new lessee has not acquired or to which a lessee does not have access, it will be speak in favour of it being unreasonable to uphold the lease.

The nature of the agreement may thus have the effect that the premises cannot be assigned. By being aware of this when drafting the lease, the risk of assignment in section 14 c of the Bankruptcy Act may in some cases be reduced significantly.

Four useful tips in relation to the assignment rules in restructuring

• Anticipate the situation by making the lease more difficult to assign due to the “nature of the agreement”.
• In case of the slightest concern as to the lessee’s ability to pay, particularly favourable lease terms should not be agreed upon.
• In case of a specific suspicion as to the lessee’s ability to pay, it should be considered to terminate the lease for convenience of cause to avoid a sudden assignment in connection with restructuring.
• It is generally recommended to obtain legal advice both when entering into a lease, when terminating the lease for convenience or cause and in case of the lessee’s suspension of payments.