Key points

  • The High Court has ruled that, where a tenant goes into administration, rent which is payable in advance and falls due before the commencement of the administration is not recoverable by the landlord as an administration expense
  • Landlords must take their place with other unsecured creditors in relation to sums payable before the appointment of administrators, even if they relate to a period during which the administrators had use of the property

Background

A tenant going into administration is never good news for landlords. The administration will result in a moratorium on any action against the tenant, e.g. to forfeit the lease, without the consent of the administrators or of the court. The landlord normally has to wait and see what the administrators' plans for the property are. However, there may be some comfort where the administrators decide that the company should continue to trade from the property (usually, in the hope of the business being sold as a going concern).

In January 2010, we reported on the case of Goldacre (Offices) Limited v Nortel Networks UK Limited (in administration). This confirmed that if a company's administrators cause it to use leasehold property for the benefit of the creditors, then that occupation is subject to the full terms of the lease. In those circumstances, administrators must pay rent that falls due under a lease as an expense of the administration - in other words, in priority to other creditors.

Is rent which falls due prior to an administration payable as an expense of the administration?

In Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd (in administration), the lease contained a usual provision requiring rent to be paid quarterly in advance. The tenant, a nightclub operator, went into administration on 28 October 2011. The rent which fell due on the preceding September quarter day had not been paid.

The landlord had sought the administrators' permission to forfeit the lease, but this had been refused. The landlord argued that, where a landlord seeks to forfeit a lease after an administration has commenced and permission is refused, all the unpaid rent becomes payable as an expense of the administration, irrespective of when it accrued due. On that basis the landlord claimed that rent which fell due on the September quarter day before the commencement of the administration should be payable as an administration expense.

The court disagreed. Relying on an old nineteenth century case, it ruled that there was a fundamental distinction between an obligation to pay rent that arises while the lease is being retained by a liquidator or administrator for the purposes of the insolvency procedure, and an obligation that arises prior to the commencement of the insolvency process. In this case, rent was payable in advance and had fallen due for payment before the commencement of the administration. Rent payable in advance could not be apportioned. Consequently, even that part of the rent that was attributable to the period after the administrators had elected to retain the property for the purposes of the administration was not recoverable as an administration expense.

The court summarised the position:

  • Where rent is payable in advance and falls due for payment prior to the commencement of the liquidation or administration, then it is provable (in the sense that the landlord may make a claim in the administration alongside other unsecured creditors). However, it will not be payable as a liquidation or administration expense. This is the case even though the liquidator or administrator retains the property for the purposes of the liquidation or administration for the whole or part of the period for which the payment in advance was payable.
  • Where rent payable in advance becomes due during a period when the liquidator or administrator is retaining the property for the purposes of the liquidation or administration, the position is different. The whole sum is then payable as a liquidation or administration expense even though the liquidator or administrator gives permission to forfeit, or vacates, before the expiry of the period for which the payment in advance is due.

When will a landlord obtain permission from the court to forfeit a lease where a tenant is in administration?

As noted above, the landlord had also asked the administrators for consent to forfeit the lease. This was initially refused and the landlord therefore made an application to court for permission. Consent was however granted by the administrators shortly before the trial. The landlord sought to recover the costs of this part of the application from the administrators.

The landlord had found an alternative tenant who was willing to take on the property on the terms of the existing lease. The administrators however wished to assign the lease to a phoenix company connected with the tenant. This was a newly formed company with no accounts history and would have been unacceptable to the landlord. The landlord argued that the administrators' delay in granting consent to forfeit had resulted in the landlord's alternative tenant no longer being willing to take a lease on the same terms. Therefore, submitted the landlord, it was entitled to its costs of the forfeiture part of the application.

Since permission to forfeit had in fact been granted, the court was not required to determine the application itself. Nonetheless, in order to reach a decision on costs it had to evaluate the prospects of success of the landlord's argument.

The court concluded that the landlord would probably have succeeded in obtaining the court's consent to forfeiture of the lease. The landlord had a proprietary interest, which was entitled to be given 'great weight' when the court was carrying out the balancing exercise of deciding whether or not to grant consent. A prospective tenant was willing to take the lease on the existing terms. The landlord's reasons for indicating that it would refuse consent to an assignment to the phoenix company were reasonable. The administrators' delay increased the risk that the landlord's new tenant would lose interest.

The court therefore ordered the administrators to pay the landlord's costs of the application for permission to forfeit the lease.

Things to consider

The High Court refused the landlord permission to appeal from the decision on whether rent was payable as an expense of administration, holding that although it might give rise to a novel point of law, the landlord's case was not realistically arguable. It is possible however that the landlord may apply for permission from the Court of Appeal.

This part of the decision in Luminar may seem harsh for landlords, but it is logical. It fits with the general tenor of landlord and tenant case law which (at least so far as monies payable in advance are concerned) looks not at the period a payment relates to, but simply the date on which it falls due (see for example our analysis on the treatment of rent payable for the purposes of the exercise of a break clause).

All is not completely lost. While landlords may lose out at the start of the administration process, they may benefit at the end. Goldacre (Offices) Limited v Nortel Networks UK Limited (in administration) confirms that if premises cease to be used for the purpose of the administration part way through a quarter, rent paid to the landlord in advance will not be recoverable by the administrators.

It seems to be common practice for administrators to be appointed tactically the day after the rent payment date. If administrators are appointed on 25 June in relation to a lease where rent is payable on the usual quarter days, then the landlord will only be able to claim the June quarter's rent in any subsequent liquidation or upon any assignment (depending upon the alienation provisions). However, the administrators, if they continue to trade from the premises, will be liable to pay all of the September quarter's rent as an expense, even if the administration is terminated or permission to forfeit granted part way through the quarter in, say, November. The risk that administrators may be able to occupy for several months effectively rent free might make it more attractive to agree to a lease variation permitting payment of rent by monthly instalments rather than quarterly, where a tenant appears to be close to going into administration.

Another option open to landlords is to apply for permission to forfeit the lease as soon as the company goes into administration (initially from the administrators, and then if that is refused, from the court). Luminar contains a helpful indication of the approach the court may take to an application for permission to forfeit a lease where the landlord has found an alternative tenant and the administrators are delaying. Even where no alternative tenant has been found however, under the principles in Re Atlantic Computer Systems PLC the administrators may be forced to pay rent which fell due prior to the administration - not as an expense of the administration, but as the 'price' to avoid forfeiture. Unfortunately for the landlords in Luminar, it was too late for this tactic to have any leverage, because by the time the case reached court the administrators had already consented to the forfeiture of the lease.

For other tips on whether or not to forfeit a lease where a tenant has gone (or is about to go) into administration, see our alert "Terminate to accumulate?".