iStock_000001293540_MediumWhen we review security for financiers, we always consider what enhancements they might implement to strengthen their security net. As part of this approach, we obtain a proprietor search from the Land Registry to see if there is any uncharged property in the name of the borrower. Often, any property identified is a short to medium leasehold interest which is generally not considered worthwhile compared to long leasehold or freehold land.

The case of Re Crosscastle saw Crosscastle Limited, who operated 2 SPAR shops in Battersea, enter administration and its business and assets being sold. A financier had charges over the leasehold premises and the case resulted in the court attributing part of the goodwill of the business to those leasehold premises.

Given this decision, financiers taking debenture security should always consider taking specific security over a leasehold interest from which a borrower trades. It will not be sufficient simply to hold a debenture charging the business goodwill, because if a third party takes a legal charge over the leasehold interest there could be a dispute on a business sale that the goodwill realisation would need to be split between the financier and the chargeholder of the leasehold property, thus reducing recoveries to the financier under its security in an insolvency situation.

In Re Crosscastle, a valuation was conducted which attributed 50% of the value of the goodwill to the leasehold premises. The percentage attributed to a leasehold charge may well differ depending on the facts involved in each case – Thomas Elias, counsel on this case has suggested that an internet business may have premises with no goodwill attached to them, whilst premises such as convenience stores or pubs may attract much more.

Security over short/medium term leases can be time-consuming to take, often the lease has no market value and consents usually need to be obtained from a landlord. It would also seem that the type of business and goodwill in place in each individual case would impact on what amount, if any, would be attributed to goodwill. But following the decision in Re Crosscastle, going forward it certainly makes sense for financiers to consider their security position in more detail where short term leasehold properties are occupied by their borrowers, particularly in circumstances where the value of their security barely covers the borrower’s liability and the value of goodwill attaching to the leases may reduce and potential shortfall.