Although only a few weeks old, 2013 has already seen HMV, Jessops and Blockbuster enter administration, joining last year's failures, which included Comet, Clinton Cards and Peacocks.  Given the number of premises these companies occupy across the UK, landlords of retail premises will inevitably be affected.

Landlords face a range of challenges depending on what the tenant's administrator intends to do.  If the administrator has no use for the premises, and the landlord is content to take the premises back, a consensual surrender may be appropriate.

The situation is likely to be more complicated if the administrator continues to trade from the landlord's premises, or if the administrator allows a third party to occupy, for example, as part of a "pre-pack" sale of the company's business.

This e-bulletin considers the up-to-date law that governs the rights of landlords and administrators when a tenant goes into administration.

1. What happens if tenants go into administration?

Administration is a process that provides a framework for the rescue of an insolvent company. The administrator takes over the running of the company from the board of directors. The main statutory objective is to save the company and its business, so that it can continue trading as a going concern. However, in practice, that is rarely achieved. Instead, the administration results in a sale of the company's business and assets. From a landlord's point of view, administrations can sometimes be problematic.

Whilst the company is in administration (or once it files a notice of its intention to enter administration) a "moratorium" is imposed. A moratorium is a protective financial and legal cloak that is placed around the company whilst the administrator decides whether a rescue package for the company can be put together and implemented. From then on, except with the consent of the administrator or the permission of the court, a landlord may not do any of the following:

  • distrain for non-payment of rent (i.e. seize goods);
  • forfeit a lease by peaceable re-entry;
  • begin or continue any court proceedings (including court proceedings for forfeiture of a lease); or
  • take any steps to enforce any security (for example under a charged rent deposit).

In practice, the landlord's options are, as a result, severely limited. Many of the usual enforcement actions that a landlord would take are not available because of the moratorium. If a landlord applies to Court for permission to take any of these actions which would effectively lift the moratorium, there is no guarantee the Court would give permission. In making its decision, the Court will balance the rights of the landlord against the rights of other creditors.

Tenant in administration – practical points

Despite market murmuring of tenants facing financial difficulties, landlords will only truly know of tenant administrations if, and when, they receive notification of the administrator's appointment. Landlords should then be ready to consider the following options:-

  • Does the existence of the administration itself create a right to forfeit the lease, and does the landlord wish to try to forfeit (which would involve seeking to lift the moratorium)? If so, it would usually be necessary to break off all communication with the tenant and not demand or accept rent, in order to prevent waiver of the right to forfeit. The other options below assume this approach is not being followed.
  • Ask the administrator to state at the outset his intentions for the premises and the administration and whether the rent will be paid.
  • Evaluate whether it is possible to take back the premises by a surrender, and re-let them.
  • Are any former tenants or guarantors of former tenants still liable for the rent? Some statutory notices must be served within strict time limits before a claim can be made.
  • Is there a solvent guarantor of the existing tenant that will pay the rent?
  • Is there a sub-tenant that could pay its rent direct to the landlord, if the landlord serves a notice under Section 6 of the Law of Distress Amendment Act 1908?
  • Does the administrator want to revise the terms of the tenant's occupation, e.g. by paying monthly rent? Care must be taken, as any variation to the existing lease terms may automatically discharge guarantors or former tenants from ongoing liability.

2. What happens if the administrator "pre-packs" the company's business?

Frequently the administration of a company results in the company's assets being sold, often as part of a sale of the company's business on a going concern basis. Where the sale of the company's assets is agreed before the company goes into administration, and is then completed immediately after the start of the administration, this is known as a "pre-pack". The courts have recognised that a pre-pack deal is a legitimate tool in appropriate circumstances and, in a number of cases, the courts have confirmed that administrators have the power to sell a company's business and assets without prior approval of the court or creditors.

Pre-packs can be a concern for all unsecured creditors, including and perhaps especially landlords. The key problem is the absence of any opportunity to be involved in the process before the pre-pack happens. In practice, administrators will often allow the purchaser of the business to occupy premises leased to the insolvent company as licensee without the landlord's consent – even if this is a breach of the terms of the lease.

Although the administrator may be paying rent to the landlord whilst the purchaser is occupying, the landlord is nevertheless placed in a difficult position with an occupier with which it has no direct relationship. Such occupation is often unexpected and the landlord is frequently "left in the dark" regarding the terms or intended duration of the purchaser's occupation, making it difficult to plan ahead.

Because of the moratorium, landlords are often unable to deal with unlawful occupiers in the normal way. In Sunberry Properties Ltd v Innovate Logistics Ltd (In Administration) [2008] EWCA Civ 1321, for example, the Court of Appeal was specifically concerned with the impact of the statutory moratorium on landlords. At first instance, the landlord of a company in administration had been given permission to commence proceedings seeking the termination of a licence to occupy its premises, which the company had given to another firm. However, the Court of Appeal overturned this decision because of the effect such termination would have had on the administration process, so the landlord lost out.

Pre-packs – practical points

If the premises are being occupied by a pre-pack purchaser of the company's business, landlords should consider:-

  • Whether they would wish to attempt to forfeit for breach of the alienation provisions of the lease (see comments under last heading about waiver).
  • Seeking details and evidence of the occupation, e.g. disclosure of the occupational licence, so that a view can be taken.
  • If the pre-pack purchaser intends long term occupation, insisting upon a formal application to assign the lease and payment of the landlord's reasonable costs of dealing with the application.  

3. What happens if the company continues to trade from the landlord's premises?

In circumstances where the company in administration continues to trade from the premises, the key question for landlords is whether rent will be paid as an expense of the administration. This is because expenses of the administration are paid in priority to claims of all other creditors (other than those with fixed charges). As the law stands, if the administrator retains leasehold premises for the benefit of creditors during the course of the administration (which in practical terms can mean occupying for trading), rent that falls due during the period of occupation will rank as an expense of the administration: Goldacre (Offices) Limited v Nortel Networks UK Limited (in administration) [2009] EWHC 3389 (Ch).

The position is different if the rent (payable, say, quarterly in advance) fell due under the lease before the administrator was appointed. Even where the period to which the rent related was, for the most part, after the administrator was appointed, the Court decided in Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd (In Administration) [2012] EWHC 951 (Ch), that the quarter's rent was still not payable as an expense of the administration. This is particularly relevant where the administrator is appointed shorty after the rent (payable in advance) falls due – for example shortly after a quarter day. Practically, this means a company in administration can continue to trade from the premises until rent next falls due (in this scenario, the next quarter day), without the rent for that period being paid as an expense of the administration.

Conversely, however, if the administrator is trading from the premises on the day that the rent fell due, then the whole quarter's rent will be payable as expense of the administration, even if the trading ceases shortly afterwards.

Administrator in occupation – practical points

If the administrator continues to trade from the premises, landlords should insist that the rent is paid as an expense of the administration, especially if the rent falls due after appointment of the administrator.

It is understood that a consortium of landlords intend to challenge the principle established in Luminar, and argue that rent referable to the period in which an administrator is in beneficial occupation of leasehold premises is payable as an expense of the administration. If this challenge is brought and is successful, it could significantly improve the position of landlords – so watch this space.

Administration is a distinct statutory regime, and should not be confused with CVAs, liquidations or the appointment of receivers – all of which have their own consequences for landlords. This e-bulletin is a summary of relevant points but specific advice should be sought for specific questions.