Tenancy or bust

The insolvency of a tenant raises a number of issues for landlords, not least their rights against an administrator, particularly one who continues to occupy the premises. Generally, administrators have accepted that they will pay rent for the period of their use, but have not adopted the lease terms.

Exeter City Council v Bairstow [2007] EWHC 400 (Ch) (also known as “Trident Fashions”; Journal, April 2007, 43) established that rates were payable as an expense of the administration, and led to legislation to give relief for unoccupied premises as in liquidations. Although the case was not binding in Scotland, equivalent changes were made here. Now the question of rent in administrations has been addressed in England, with interesting results.

Terms of the lease

In Goldacre (Offices) v Nortel Networks UK Ltd (in Administration) [2009] EWHC 3389 (Ch) the administrators continued to occupy a small part of the property let to the company. The judge decided, on a line of authority going back to 1871, that rent was an expense in the administration; and

if not that, was a necessary disbursement (which would also give priority over the administrator’s remuneration, corporation tax and payments to creditors). This distinction relates to the wording of the English Insolvency Rules. The Scottish rules are different (see below).

The administrators argued that the payments should be tailored to their usage. The judge disagreed. He held that the rent falling due, which was payable quarterly in advance, was not subject to apportionment, and in electing to hold leasehold premises for the purposes of the administration, the administrators could do so only on the terms of the lease.

The judge also referred to the Court of Appeal decision Sunberry Properties v Innovate Logistics [2008] EWCA Civ 1321. There the court, balancing the landlord’s interests with those of the administrators, refused the landlord permission to bring proceedings to terminate a six month occupational licence granted by the administrators in breach of covenants in a lease with an unexpired term of 20 years. It then limited the amount of rent to be paid by the administrators to the sums passing under the licence (a monthly payment rather than the quarterly payment required by the lease).

In Goldacre, the judge indicated that if he were required to exercise a discretion as to how much the administrators would be liable to pay, he would conclude that they should pay the whole rent falling due under the two leases concerned, as (on the evidence available) their occupation of part demonstrated that there was no realistic prospect of maximising the return from the property as there were security issues and an adverse effect on the prospects for redevelopment. The part occupied by the administrators comprised part of the demise in each of the two leases.

The judge was of the view that Sunberry was not binding on him, as it proceeded on a concession not made in Goldacre.

In conclusion, the judge said that if the administrators vacated the premises demised under one or both leases, the relevant rental liability would cease to be payable as an expense of the administration.

Comment

The main issues addressed here are how much rent should be paid and when. Goldacre stresses that it is more important than ever for administrators to negotiate a solution with landlords, particularly if they can show that the company has insufficient funds to make payments in full or in a timely manner.

Goldacre did not address one potential issue. If the full quarter’s rent falls due as an expense with no right of apportionment, what is the position if an administrator is appointed shortly after a quarter date? Will the full quarter’s rent be a pre-appointment debt even if the administrator uses the property?

It will also be interesting to see what further arguments may be developed from the judge’s decision that the administrators could only hold the premises on the terms and conditions of the lease. What other conditions may become liabilities as an expense of the administration?

The decision has no binding effect in Scotland, but is likely to be persuasive. The rules as to priority of expenses are different in Scotland, where priority is afforded to “any outlays properly chargeable or incurred by the administrator in carrying out his functions in the administration” (rule 4.67 as applied by rule 2.39B). This broadly equates to the priority of “expenses” in the English rules but lacks the provision for “necessary disbursements” which provided an alternative ground of priority in Goldacre. This is probably not significant; it would seem likely that the rental liability would be held to be an outlay in terms of rule 4.67 and the same priority applied.

Whether the Scottish courts would follow this first instance decision and refuse to allow an apportionment of rent according to usage, is matter for conjecture, or testing in pleadings in due course.

• Alistair Burrow, Partner and Head of Recovery & Insolvency Team, Tods Murray LLP