Relief from forfeiture available for finance lease of equipment and effect of sale pursuant to court order

In On Demand Information plc v Michael Gerson (Finance) plc ([2002] UKHL 13) M and O entered into four finance leases of video and editing equipment. The leases were for ‘primary’ periods of two years and would then continue for an indefinite secondary period. In effect, O was to pay for the equipment (through the rentals) during the primary period and the rentals for the secondary period were nominal. During the secondary period the lessee could sell the equipment at the best price available with the lessor’s consent and keep 95% of the proceeds of sale (as an ‘abatement of rentals’). 

The leases stipulated that the appointment of a receiver of the lessee would be a repudiatory breach. The lessee went into administrative receivership when the primary period of two of the leases had ended and was about to end in the case of a third lease. There were three months left of the final lease and it was only in respect of this lease that there was an outstanding primary period rental still to be paid. The lessor sought to rely on the breach to bring the leases to an end. The lessee argued that it was entitled to relief from forfeiture.

The lessor consented to a sale of the property under RSC Ord. 29 r. 4. This was without prejudice to the parties’ rights and was intended to allow the best value to be obtained for the property.

At first, the lessors had argued that relief had always been unavailable in this case since the leases were purely contractual. This had failed in the Court of Appeal; relief was available. The rights were not purely contractual and the conditions in which the court should consider relief were met ([28] and [29] of the House of Lords report). This aspect was not part of the appeal to the House of Lords.

The question was whether the sale had the effect of making relief impossible. The first instance judge and the Court of Appeal thought so. The House of Lords held that the sale pursuant to a court order which was expressly without prejudice to the parties’ rights did not take away the right to relief but shifted the parties’ rights from the property to the proceeds of sale.

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