WeWork has recently succeeded in its application[1] to dismiss the first of two forfeiture claims brought by the landlord of its flagship UK location at Two Southbank Place in London.
The high court's decision will have significant implications for both commercial landlords and tenants, particularly in the context of insolvency and lease forfeiture.
Background of the Case
The application was brought by an SPV within the WeWork global group. The lease related to a 300,000 square foot office space which was initially leased to WeWork in 2019.The lease included a forfeiture clause allowing the landlord, (SBP 2 S.À.R.L), to re-enter the premises under certain conditions, including if the tenant or guarantor was deemed unable to pay its debts as defined by sections 122 and 123 of the Insolvency Act 1986 (IA 1986). Those sections require proof of insolvency "to the satisfaction of the court".
In November 2023, a corporate restructuring of the US based guarantor company, WeWork Companies LLC, led to concerns about the guarantor's ability to fulfil its obligations. Consequently, the landlord served a section 146 notice to forfeit the lease and re-enter the premises.
Key Legal Issues
The central issue was whether the reference to sections 122 and 123 of the IA 1986 in the forfeiture clause required a court determination of the solvency of the guarantor before the landlord could exercise its right of re-entry. The landlord argued that the restructuring and subsequent Chapter 11 bankruptcy of the guarantor entity justified the forfeiture, while the tenant contended that a formal court determination of insolvency was necessary.
WeWork argued that as a result of the restructure (which divided the original guarantor into two separate companies) one of those new entities had become the guarantor under the lease, and that company's inability to pay its debts on a cash-flow or balance sheet basis had never been determined by a court, as required under the lease.
The Court's Decision
The High Court ruled in favour of WeWork stating that the forfeiture clause did require a court determination of insolvency under sections 122 and 123 of the IA 1986 before the landlord could re-enter the premises.
The court emphasised that the mere restructuring and bankruptcy of the guarantor entity did not automatically satisfy the conditions for forfeiture without a formal insolvency determination.
Implications of the Decision
This decision has several important implications:
- Clarification of Forfeiture Clauses: The ruling clarifies that landlords cannot rely solely on corporate restructuring events to trigger forfeiture clauses that specifically refer to insolvency based on sections 122 and 123 of the IA 1986 without a formal court determination of insolvency.
- Protection for Tenants: Tenants are afforded greater protection against forfeiture actions based purely on insolvency grounds.
- Impact on Lease Agreements: Commercial lease agreements may need to be reviewed and potentially revised to ensure that forfeiture clauses are clear and enforceable.
Conclusion
The wording of the forfeiture clause in this case is relatively common in commercial leases. The court's approach in this case is therefore something for landlords to be alive to going forward.
The decision highlights the importance of precise legal language in leases. This case also serves as a critical reminder for both landlords and tenants to carefully consider the terms and conditions of their leases as well as the correct legal process required as a pre-courser to enforcement.
[1] SBP 2 S.À.R.L v 2 Southbank Tenant Limited [2025] EWHC 16 (Ch)
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