The Goldacre decision about rent payable by tenants in administration was heralded as a victory for landlords. In reality, it has led to further disputes, including the recent litigation involving the Luminar administration. Mathew Ditchburn asks whether the case has lost its lustre.
Back in the noughties, landlords and administrators had what might be described as a “gentlemanly” approach to paying rent. If a tenant fell into administration but continued to use leased premises then generally it would pay rent at a daily rate commensurate with its use.
Few seemed troubled by the fact that most commercial rents were payable quarterly in advance and not apportionable. The convention left both parties satisfied that it was the fairest way to deal with an unfortunate situation.
It was not the universal practice, however, and there were notable instances of administrators refusing to pay rent when, for example, a buyer of the business had been allowed into occupation to use the premises free of charge. A debate ensued about whether an administrator had to pay the rent due for any period he used the premises as an expense of the administration. If so, it would be payable out of the insolvent estate in priority to other debts.
The Court of Appeal in Re Atlantic Computer Systems Plc1 suggested that administrators had a discretion to decide what was an expense of the administration. If they decided not to pay the rent as an expense then, as a result of the statutory moratorium under the Insolvency Act 1986, the landlord could not forfeit, distrain or sue for the arrears without the court’s permission.
In Re Toshoku Finance UK Plc,2 the House of Lords disagreed with this approach and decided that the liquidators had no discretion to decide whether corporation tax was an expense of the liquidation. The same rationale was applied in Exeter City Council v Bairstow3 in relation to business rates in an administration but a question mark remained over the treatment of rents in this context.
Matters came to a head in Goldacre (Offices) Ltd v Nortel Networks UK Ltd (in administration).4 Here the administrators only wanted to pay rent for the part of the premises they were using. The court applied Toshoku and Exeter City Council to conclude that the administrators had no choice but to pay all the rent as an expense whilst they used the premises. Further, as the Apportionment Act 1870 did not apply to rent payable in advance, the administrators had to pay the entire quarter’s rent as an expense if they used the premises on the quarter day, even if they stopped using it part way through the quarter.
The initial reaction of landlords was triumphant. The expectation was that Goldacre would level the playing field in negotiations with administrators and ensure that landlords were left less out of pocket than they might otherwise have been. Not only did administrators have to pay rent for their use of the property but the non-apportionment principle could insulate landlords against some of the losses they would incur if the administrators subsequently vacated and landlords faced a void period.
It was soon realised that Goldacre contained a potential flaw for landlords. If the post-appointment rent was not apportionable then the same must apply to preappointment rents. Rent arrears falling due prior to an administrator’s appointment rank as an unsecured claim and not an expense meaning that landlords receive only a few pence in the pound, if anything. Following Goldacre to its logical conclusion, if an administrator is appointed after the quarter day then no part of that quarter’s rent is payable as an expense, even if the administrator uses the property for the rest of the quarter. In other words, liability to pay rent as an expense has come down to a simple matter of timing.
The issue is compounded by the interim moratorium that arises upon a company serving notice of intention to appoint administrators. This gives the tenant a short period of protection against landlord action to enforce rent arrears.
If a company files a notice of intention just before the quarter day and appoints administrators shortly after, the unpaid rent falls through a statutory loophole where landlords are unable to forfeit or distrain without permission or seek payment as an expense of the administration.
In Leisure (Norwich) II Ltd and others v Luminar Lava Ignite Ltd (in administration),5 decided in March this year, the court confirmed that where rent is payable in advance and falls due for payment prior to the commencement of the administration, it is not payable as an expense even if the administrator retains the property for the purposes of the administration.
No doubt the court was aware of the potential ramifications for the rescue culture if the landlord’s claim in Luminar had succeeded. The retailer Game, for example, appointed administrators shortly after the March 2012 quarter day and continued to trade from most of its stores. Had it been required to pay the March quarter’s rent for those stores as an expense then the cost could have thrown the entire survival of the business into jeopardy.
Landlords might be forgiven for thinking that Goldacre has turned out to be something of a poisoned chalice. In truth, it has created unfairness on all sides.
Tenants in administration can lose out when they stop using the property in the middle of a quarter but have to pay rent for more than their period of use; a windfall for landlords, but not in the interests of creditors as a whole. Potential sales of leasehold property by administrators could be lost if not completed before the quarter day as the administrators may not want the risk of having to pay another quarter’s rent. This does not help the survival of the business. As timing has become so important, the result can be a lot of tactical games, sometimes at the cost of sensible, commercial co-operation.
Goldacre remains good law and has now received further judicial endorsement in Luminar when the court said it was “plainly right”. This could be a signal that it would be up to government, rather than the courts, to revisit the expenses regime. In the meantime, many landlords may consider going back to the previous “pay-as-you-go” approach, which has advantages for both sides and requires them to co-operate – which cannot be a bad thing.
This article was previously published in Estates Gazette on 2 June 2012