Landlord's hypothec: the permutations

Having written an article in the Scots Law Times on 13 November 2009 on the above, Alistair Burrow’s article “Uncertain Security” (Journal, January 2010, 47) was of great interest to me.

My own article analysed the landlord's hypothec in respect of pre-appointment claims by a landlord in sequestration, administration, liquidation and receivership, whereas Alistair's article looks at practical issues for a landlord in respect of pre-insolvency appointment claims and post-insolvency appointment claims.

I had not considered the post-insolvency appointment position of a hypothec, and none of the traditional authorities confirm (or indeed deny) that a landlord’s hypothec would be applicable in respect of post-insolvency appointment rent obligations.

Sequestration

As all insolvency law in Scotland flows from the law relating to sequestration, an analysis of that would be the logical place to start. Sequestration is an inclusive process which deals with all creditors, and under what is now s 31 of the Bankruptcy (Scotland) Act 1985 (the “1985 Act”), the whole estate of the debtor vests in the trustee as at the date of sequestration. Section 33(2) however states that the vesting of a debtor’s estate in a trustee shall not affect the right of hypothec of a landlord.

One now needs to read that against the background of s 208 of the Bankruptcy & Diligence Etc (Scotland) Act 2007 (the “BAD Act”), which provides that the hypothec no longer arises in relation to property which is owned by a person other than the tenant. Accordingly if the lease is in the name of the tenant and all the property in the subjects let is vested in the trustee, then if it were not for s 33(2) the hypothec would not operate as the goods would not be owned by the tenant any longer.

As rent is normally payable in advance for a period, assuming that there are arrears of rent due on sequestration then it is likely that some of those arrears which are due will relate to the period overlapping the beginning of the sequestration. Rent will then only become due post the insolvency appointment for the next period.

On the basis that most sequestrations do not trade on, there are three courses of action open to the trustee: (1) the trustee could adopt the contract of lease; (2) the trustee could abandon the lease; or (3) the trustee could remain in occupation using the property but neither intimating to the landlord that he is adopting the lease nor abandoning the lease.

In the case of adoption the trustee will take on the liabilities, pay the rent etc, and the hypothec is therefore not an issue. In the case of abandonment, the landlord would have a damages claim but the hypothec would not apply since it only applies to rent. In the event of the trustee continuing to occupy the property but neither adopting nor abandoning the lease, one would anticipate that the trustee would accept that he would require to pay rent during his period of occupancy or until the lease was brought to an end by the actions of the landlord. Such rent would form part of the outlays of the trustee in the administration of the debtor's estate and rank accordingly under s 51(1)(b) of the 1985 Act. The landlord could bring matters to a head by either irritating the lease or, under s 42 of that Act, request the trustee to confirm that he is adopting or refusing to adopt the lease, and the refusal to adopt would constitute abandonment. Other than for pre-appointment rent, is the hypothec, even if there is one, relevant or of value for the period for which rent is due?

Administration and liquidation

I have difficulty seeing why a landlord would seek to claim a hypothec for any post-appointment arrears in an administration or a liquidation. Goldacre (Offices) Ltd v Nortel Networks UK Ltd (in administration) [2009] EWHC 3389 (Ch) is quite clear authority in England, which I am confident will be followed in Scotland, that if the administrator occupies leased property for the benefit of the creditors then the rent would be an expense of the administration under the Insolvency Rules 1986, rule 2.67(1)(a). That case not only refers to rent due in respect of the period of occupancy but rent due during the period occupied. Accordingly if a quarter's rent was due one week before the administrator proposed to leave the premises then the whole quarter's rent would have to be paid. Since the landlord's hypothec relates only to the goods on the subjects let owned “by the tenant” and would not cover goods purchased by the administrator which had been brought on to the premises, surely a claim in the highest category of ranking possible against the whole assets of the company in administration, which is what rule 2.67(1)(a) would provide, must always be a better position for the landlord to be in.

Goldacre (Offices) Ltd makes reference to the “Lundy Granite principle”, whereby liquidators are held liable to pay rent as a liquidation expense where the liquidator makes use of or retains, for the benefit of the liquidation, possession of leasehold premises.

Receivership

This is probably the most complex category since receivership is not a pure insolvency process. Reference however should be made to s 55(3)(b) of the Insolvency Act 1986, which provides that the powers of the receiver in respect of the property covered by the floating charge are "subject to the rights of any person who holds over all or any part of the property of the company a fixed security... having priority over... the floating charge by virtue of which the receiver was appointed”. The landlord's hypothec is a fixed security, therefore the power of the receiver to intromit with the goods on the property let at the date of appointment is subject to the rights of the landlord. The receiver should think twice about bringing goods onto the leased property unless they are in his own name and accordingly, post the BAD Act, not subject to the hypothec.

Conclusion

Consequently the position I reach is that I am not aware of any authority to confirm that it was ever intended that a landlord’s hypothec applies following the appointment of an administrator, liquidator or trustee in sequestration, and the law has provided at least comparable remedies in the insolvency process. Receivership could be different, since it is, as noted above, not a pure insolvency process.

Finally Alistair makes reference to the removal of items from premises which were covered by the hypothec. In simple terms an administrator, a liquidator or a trustee would be an officer of court and ought to treat all creditors equitably. (Conflicts of interest ought not to arise, with each creditor receiving not a penny more nor a penny less than their legal entitlement.) I can see no justification which would be acceptable for moving the goods unless the intention was to account to the landlord for the proceeds, and J Graham Stewart (The Law of Diligence) states that there is a right to obtain a warrant from the court to "carry back" the goods if they are removed from the subjects: this right is incidental to the right of hypothec rather than to the right of sequestration (for rent). As noted above, the receiver only has his powers subject to the rights of the landlord holding the hypothec, and I would question whether the receiver would be entitled to move the goods to other premises unless it was intended to facilitate a sale, when there would be an accounting to the landlord for his rights under his hypothec.