The capital value of a lessee's interest is equal to the assignment value of the lease.
This results in an unexpected outcome when one applies the law on dealings between a company and related parties. Section 29 of the Companies Act, 1990 allows a company to avoid any transaction made between it and a related individual (such as a director) which involves a “non-cash asset” of sufficient value (usually 10% of the company’s net assets). A shareholder resolution is required to render such a transaction enforceable. In Kerr v. Conduit Enterprises Ltd. [2010] IEHC 300 Finlay-Geoghegan J considered the application of Section 29 to commercial leases.
In 1997 the defendant company leased offices from a number of individuals, including two of its own directors. The company changed hands a number of times and, in 2008, the new owners attempted to disclaim the lease. The company argued that the lease had never been approved by shareholder resolution and, consequently, could be avoided under Section 29. The landlords took a different view and commenced proceedings seeking a declaration that the lease was still valid.
Finlay-Geoghean J agreed with the landlords. The judge noted that there was some ambiguity as to how a lease should be valued. However, clarity on this point was crucial as if the lease was worth less than 10% of the net assets of company then the lease would fall outside the scope of Section 29.
The judge noted that a lease had different values to a landlord and to a tenant. The value to the landlord was the right to receive rent and to have the covenants obeyed. The value to the tenant was the right to exclusive possession of the property, subject to the payment of rent. The judge held that the value of the lessee’s interest is equal to the assignment value of the lease, i.e. how much the lease would fetch on the open market.
The Expert evidence at the trial was that the lease, when created, had no assignment value. As the lease was in that sense worthless, it fell outside of the scope of Section 29.
This decision provides a clear test for determining the value of a lease for the purposes of Section 29. It will be welcomed by practitioners who may be advising on transactions between companies and related individuals. Moreover, there is a clear logic to Finlay-Geoghegan J’s approach: a lease is worth what another tenant would be willing to pay for it.
The approach adopted in this case highlights the paradoxical nature of the Section 29 prohibition in the context of the value threshold. Where a company enters into an onerous lease which is of either no value to, or a liability on, the company, then shareholder approval will not be required. Conversely, where the lease is an asset to the company then such shareholder approval will be needed.
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