In our e-update of 20 January 2010, we looked at a decision of the English courts from December 2009 in which it was decided that, in England, the Administrators of a tenant company are bound to account to the landlord of premises for rent due in relation to the period during which those premises are being used in connection with the administration, and that the rent is to be paid as an expense of the administration. In other words, the landlord's claim for rent enjoys a high level of priority in the tenant's insolvency and the Administrators (and a court, if the matter ends up there) have no discretion in the matter.

The position of the Scottish courts on this point was unknown but widely predicted to be the same as in England, due to very similar insolvency rules. Now, the case of Cheshire West and Chester Borough Council -v- Springfield Retail Limited (In Administration) (decided by the Outer House of the Court of Session in Edinburgh on 13 August 2010) confirms that the Scottish courts will indeed follow the approach of the English courts.

The leased premises in the Springfield Retail case were situated in England, but the insolvent tenant company was registered in Scotland and therefore the case was brought in Scotland.

The facts were simple and not unusual. The Administrators traded for a short while after their appointment and then sold the business. As is common, the Administrators granted a licence to occupy to the buyer in breach of the lease and in anticipation that the buyer would formally become the tenant of the premises by virtue of an assignment from the Administrators with the consent of the landlord. The buyer was required by the Administrators to pay rent direct to the landlord but no rent was paid. The licence lasted for six months and the lease was never assigned as the buyer did not take any steps to have the lease assigned.

In making the Administrators liable to pay rent as an expense, the court held that it did not matter that the Administrators had not been trading from the premises; it was enough that the licence to occupy had been granted to the buyer for the purposes of the administration.

The consequence of the decision is that the Administrators will be required to account to the landlord for rent for the six month period of occupation by the buyer. The sum involved is estimated to amount to approximately two thirds of the total sale price realised by the Administrators from the sale of the business.

The decision is good news for landlords of Scottish tenants who have gone into Administration. The lesson for Administrators is to:

  • try to obtain as much of the rent as possible from the buyer at completion of the business sale so that the Administrators have the comfort of knowing that the rent will be paid
  • consider requiring the buyer to pay into a deposit fund periodically to cover future rent
  • try to ensure that the buyer/occupier is of sufficient financial standing to be able to pay the rent during the period of the licence. Could a guarantee be given by a third party? Or a floating charge by the buyer over its assets?
  • ensure that the licence to occupy entitles the Administrators to terminate the licence and remove the buyer from the premises if the buyer fails to pay the rent. In this way, the Administrators can bring to an end the liability to pay rent (as that liability arises for as long as the premises are being occupied in connection with the Administration).