In the event of a tenant becoming insolvent, it is clearly important for a landlord to know where rent payable ranks in administration. A recent landmark decision handed down by the High Court strengthens the position of landlords by deciding that rent can now be more widely payable as an expense of the administrator.

Background

Simply, if rent is ranked as an expense of the administration1 then it is almost always discharged in full as a mandatory expense of the administrator, rather than being placed with lower priority creditors.

Previous case law suggested the favoured approach taken by the Courts was to treat any rent payable on leasehold premises in administration on an individual basis to decide whether rent could be classed as an expense. The former leading case2 held that when deciding where the landlord’s claim should lie, the interests of the landlord in being denied his property and the interests of the creditors as a whole needed to be balanced. However, an important case decided in December 2009 has now modified this principle.

Goldacre (Offices) Limited v Nortel Networks UK Limited (in administration)3

The facts

Goldacre (Offices) Limited (“Goldacre”) was the landlord of Nortel Networks UK Limited (“Nortel”), who went into administration. Once in administration, Nortel scaled down its operations but remained in occupation of a small part of the leasehold premises owned by Goldacre, whilst the other parts were sublet to various tenants.

The High Court held that if a company in administration uses leasehold property for the benefit of its creditors, any rent that falls due during the period of use will rank as an expense of the administration as it is one of the necessary disbursements of the administrator4. The Court was not bound to follow any previous decision5 as it was made under the pre-Enterprise Act administration regime.

When does rent become payable as an expense?

Rent only becomes payable as an expense if two criteria are fulfilled.

Firstly, the company in administration must be using the premises for the benefit of the creditors. There is no detailed guidance arising from cases involving administration but cases involving instances of liquidation hold that use will include entire occupation6, partial occupation7 and keeping assets in the premises to achieve a better sale price8. On the contrary, complete vacation of the property9 and simply allowing the lease to subsist will not constitute use10 by the administration.

Secondly the rent must fall due for payment when the company in administration is using the premises for the benefit of its creditors. If the rent does fall due during such a period, then the full amount will become due, possibly irrespective of the proportion of the property being used11 or the length of the occupation.

Conclusion

It is clear that the decision in Goldacre can significantly improve the position of landlords who are presented with a tenant in administration. A prudent administrator will assume they will have to provide for the full amount of rent that falls due if the company uses the premises for the benefit of the creditors.

However, landlords must not be complacent as even if the rent is classed as an expense of the administration, there must be sufficient assets to discharge the liability. Furthermore, administrators are likely to be more cautious with leasehold properties and will ascertain the tenant’s leasehold properties and liabilities more quickly in order to avoid unnecessary expenses. They may vacate properties as soon as possible if they anticipate that they will be unable to meet the rent liability, and the landlord will lose any entitlement to have the rent paid as an expense. As a result, landlords may now wish to liaise further with administrators than previously to agree reduced rents rather than lose all income or become involved in any dispute over rent.