Restaurant EC3 Limited v Tavor Holdings Limited

This appeal came out of a commercial lease dispute that turned into an insolvency problem. A restaurant tenant said its landlord had re-entered the premises unlawfully and that this gave the tenant a cross-claim which should reduce the debt relied on in a winding-up petition.

The High Court dismissed the appeal. It held that, on the tenant's assumed case, any mesne profits claim for the landlord's alleged wrongful occupation had to take account of the rent the tenant would have had to keep paying under the lease.

That meant there was no substantial cross-claim on the facts before the court. The court also said the company had not shown a real ability to pay even the lower figure it said was undisputed within a reasonable time.

The tenant held a lease of London commercial premises at an annual rent of £95,000. After a statutory demand and non-payment, the landlord re-entered and changed the locks. The tenant then sued in the County Court, saying the re-entry was unlawful.

Its case was that the lease had been varied so the landlord had waived forfeiture. It also said that negotiations between the parties meant the landlord should not have re-entered when it did. The tenant claimed possession, damages and, in the alternative, relief from forfeiture.

That property dispute became critical in the insolvency case. The landlord petitioned to wind up the tenant company for a debt of £290,175.26. The tenant tried to resist the petition by saying it had a genuine and substantial cross-claim.

But one part of its damages case had already weakened badly. The tenant admitted that related companies, not the tenant itself, had operated the business from the premises. That made it difficult to maintain claims for lost profits, wages and redundancy costs in the tenant's own name.

The remaining argument was narrower but commercially important. The tenant said that if the landlord had been occupying the premises unlawfully after re-entry, the tenant could claim mesne profits at a daily rate based on the lease rent. If that worked, the petition debt could be reduced significantly.

The insolvency judge gave the tenant a chance to make legal submissions on that point and to show it could pay the undisputed balance. After further hearings, the judge rejected the mesne profits argument and later wound up the company.

The central issue was not whether the landlord had in fact acted unlawfully. For the appeal, the court proceeded on the assumption most favourable to the tenant: that the landlord's re-entry was wrongful and that the landlord was therefore a trespasser.

The real question was how to value the tenant's resulting claim. Could a commercial tenant under a rack-rent lease claim mesne profits measured by a reasonable rent for the landlord's use of the premises without deducting the rent the tenant itself would have had to continue paying under the lease?

If no deduction was required, the tenant's cross-claim could materially reduce the petition debt. If deduction was required, the claim might be worth little or nothing.

A second issue followed from that. If the debt had been lower than the judge first concluded, should the winding-up order still stand, or should the company have been given more time to pay?

Mr Justice Miles dismissed the appeal. He held that damages for trespass of this kind are compensatory. The court relied on the approach explained in One Step, which treats user damages as compensation for the loss of the right to control valuable use of property.

The court rejected the idea that the tenant could recover a notional rent from the landlord while ignoring the rent the tenant itself would have had to pay to keep its leasehold rights alive. In a rack-rent lease, the tenant's right to exclusive possession and its obligation to pay rent are interdependent.

To place a reasonable economic value on the tenant's invaded rights, the cost of maintaining those rights had to be taken into account. Otherwise the tenant would be overcompensated. On that analysis, the tenant's mesne profits claim was extinguished by the arrears due under the lease for the same period, so there was no substantial cross-claim capable of reducing the petition debt.

The court also dealt with the winding-up order on an alternative basis. Even if the tenant had been right and the undisputed debt had been around £120,000 rather than £290,000, the evidence still did not show a reasonable prospect of payment within a reasonable time.

The company had relied on possible support from another company ultimately owned by the same individual, but the evidence did not show funds would actually be available quickly enough. So the winding-up order would have stood anyway.

The practical lesson is that a lease dispute and an insolvency dispute can interact in ways that are harsher than many business owners expect. If your company owes rent and the landlord presents a winding-up petition, it is not enough to point to a separate claim and say the debt is disputed.

The court will test whether the cross-claim is genuine, substantial and legally capable of reducing the debt. A claim that sounds valuable in ordinary business terms may still fail to help if the court decides its legal value is much lower than the company says.

This case is especially important where the tenant's argument is based on the landlord's alleged wrongful occupation after forfeiture. The court may ask what the tenant's rights were really worth in economic terms. If those rights only continued because rent remained payable, the rent may be deducted when valuing the claim. That can leave the debt effectively unchanged.

The case also shows why group structures matter. If a related company actually runs the business from the premises, but the lease sits in another company, losses may not fall where you think they do. A tenant company that did not itself trade may struggle to claim lost profits or staff-related losses. That can remove the most commercially significant part of the defence to a petition.

For business owners, the wider message is simple. Keep the leaseholding entity, the trading entity and the evidence of loss aligned as far as possible. If they are not aligned, a dispute can become much harder to run when cash flow pressure turns into insolvency pressure.

For tenants, the safest reading of this case is operational rather than theoretical. If arrears are building, act before the dispute becomes a lock-change and winding-up problem. Review the lease, payment history, any side agreements and who actually occupies and trades from the premises.

If you think the landlord has waived forfeiture or agreed to hold off, gather the documents and messages that support that position. In this case, the tenant's underlying property arguments were not decided on the appeal, but the insolvency court still had to decide whether the claimed cross-claim had enough value to matter.

Also separate two questions that often get blurred in practice. The first is whether the landlord acted lawfully. The second is how much the tenant's claim is worth even if the tenant is right. This case turned heavily on the second question.

For landlords, the case is a reminder that forfeiture and insolvency routes can overlap, but they should still be handled carefully. The appeal proceeded on the assumption of wrongful re-entry, even though the landlord ultimately succeeded on the valuation point and the winding-up outcome.

A landlord should still make sure the basis for re-entry and the debt position are properly documented. Success on one issue will not always protect against risk on another.

For both sides, evidence on ability to pay matters. If a company asks for time, the court will want concrete material showing where the money is coming from and when it will arrive. A general statement that another group company may assist is unlikely to be enough without a clearer and quicker funding picture.