For landlords, a tenant in administration is just about your worst nightmare. A moratorium prevents you from suing for outstanding arrears or forfeiting the lease and you may be left with an empty unit generating no income.
Now it seems if administrators are using your premises, the rent might not even be paid as an expense simply because of when they were appointed. So what has happened?
- Goldacre: Advantage landlord
In Goldacre (offices) Ltd v Nortel Networks UK Ltd [2009] EWHC 3389 (Ch), rent was held to be automatically an expense if administrators were using the premises for the benefit of the creditors, and the rent fell due while they were in office. Furthermore, the rent could not be apportioned to reflect the actual period of occupation, even if administrators vacated the premises midway through the quarter because the Apportionment Act 1870 did not apply to rents payable in advance. Therefore all of the rent for that period was an expense.
The result was welcome news for landlords who could now reasonably expect administrators to pay rents on property occupied by them or by a third party given a licence to occupy by the administrators, in priority to the administrator’s costs and other unsecured claims. Although Goldacre has been much criticised, it has now been referred to three times, once by the Scottish Court of Session in Re Springfield Retail Ltd [2010] CSOH 115, and twice by the English Courts in Leisure (Norwich) II Ltd v Luminar Lava Ignite [2012] EWHC 951 and most recently in MK Airlines Property Limited (in administration) v Katz [2012] All ER (D) 142 (May).
- Luminar and MK Airlines Property: Administrators bite back
Luminar deals with the flip side of Goldacre – where rent falls due before the appointment of administrators. Unfortunately for landlords, it does not make for good reading.
Administrators were appointed on 28 October 2011, a month after the rent on four of the company’s leases had fallen due on 29 September 2011. As in Goldacre, the rent in Luminar was due in full in advance on the quarter day. Although the administrators continued trading from the premises, rents due on 29 September 2011 were all unsecured claims in the administration. The Court summarised the position neatly and held that:
- All rent payable in advance which falls due after administrators are appointed was an expense if the administrators used the premises at any point during that period;
- All rent payable in advance but had fallen due before administrators are appointed was an unsecured claim, even if the property was used by the administrators; and
- Where rent is payable in arrears, since the rent accrues on a day-to-day basis the amount of rent to be treated as an expense depended on the actual period of use by the administrators.
In Goldacre, the court accepted that using the premises for the benefit of the administration meant the rent fell within at least one of the categories of administration expenses in Insolvency Rule 2.67(1), which then made it automatically payable as an expense. In Re Toshoku Finance [2002], Lord Hoffman previously suggested that where an item of expenditure did not strictly fall within the category of expenses in the Insolvency Rules, the court still had a discretion to treat those payments as if they were an expense. However, those believing this may have lead to a rethink of the principles behind Goldacre may want to think again following the Luminar decision, and most recently the decision of Mr N Strauss QC in MK Airlines Property Limited.
In MK Airlines Property Limited, provisional liquidators were appointed on 22 June 2010, two days before rent fell due under a lease on 24 June 2010. They did not initially use the premises, but were using it by the time the next payment fell due on 29 September 2010. The Judge endorsed the Goldacre decision in holding the June quarter’s rent was an unsecured claim, but the September quarter’s rent was an expense. He then went on to say that the June quarter rent could not be apportioned to reflect that at some point before 29 September 2012, the provisional liquidators had started to use the property. Although he acknowledged neither party had raised the apportionment issue or argued the point before him, the Judge considered the decision in Goldacre to be sound on that point.
Crucial to the decision in MK Airlines Property Limited was the finding that merely securing assets at the premises was not enough to make the rent an expense. The provisional liquidators were in office on 24 June 2012 when the rent fell due, but it was only when they had formed the view to retain the lease because it avoided the cost and risks associated with moving the assets elsewhere that it triggered the rent to become an expense. At that point, the provisional liquidators were no longer only securing the assets, but seeking to achieve a more advantageous sale for those assets.
Although the case relates to a provisional liquidation, in the Judge’s view the same principles applied equally to liquidations and administrations.
- Where are we now?
For landlords, whilst Goldacre signalled a step in the right direction, the decisions in Luminar and MK Airlines Property Limited undoubtedly favour administrators and other office holders, particularly those appointed after a quarter day. Even those appointed before the quarter day might find they have a small window of opportunity to allow them to consider whether or not to actually put a property to use before the rent becomes an expense for that period.
It seems that unless someone is prepared to test these cases further, the chances are we may now see an increase in administration appointments shortly after the quarter days.
