Nortel Networks UK Limited (the company) was a tenant under two leases. The company went into administration. The administrators occupied a small proportion of each of the premises to enable them to carry out the administration. Under the terms of both leases rent was payable quarterly in advance.

The landlord applied to the court for an order directing the administrators to pay the rent as an expense of the administration.

The landlord contended that once the administrators had decided to use part of the property for the beneficial outcome of the administration, they were liable to pay the rent as an expense of the administration (following the analogy with the rules applying to liquidators, as laid down in In Re Lundy Granite Co, ex parte Heavan).

The administrators argued:

  1. rent was only a necessary expense of the administration (for the purposes of the insolvency rules) if the administrators chose to pay it or if an application was made to the court and the court, in exercising its discretion, ordered it  
  2. because they were only using part of the premises, only a proportionate amount of rent should be payable as an expense of the administration.

The court rejected both arguments. It confirmed that if the administrators cause the company to use leasehold property for the benefit of the creditors, then that occupation is subject to the full terms of the lease. On that basis, the administrators must pay the rent that falls due under the lease as an expense of the administration. If the premises ceased to be used for the purposes of the administration part-way through a quarter, since the rent was payable quarterly in advance, it would not be apportioned and the administrators would not be entitled to a partial refund of the rent paid for that quarter.

The case should be distinguished from the Court of Appeal decision in Sunberry Properties Ltd v Innovate Logistics Ltd. That case noted that where a landlord applies for permission to bring proceedings against a tenant in administration (for example, for forfeiture of the lease), the court maintains a discretion. In considering whether or not to grant leave to the landlord to proceed with its action, the court will normally balance the interests of the landlord against those of the creditors of the company, giving due regard to the proprietary interests of the landlord in accordance with Re Atlantic Computer Systems plc. However, in Innovate, the landlord was not looking to forfeit the lease. Rather, it was seeking to bring proceedings against the tenant for the termination of a licence granted by the administrators over the property. On that basis, having carried out the balancing exercise laid down in Atlantic Computers the Court of Appeal in Innovate dismissed the landlord's application. Although the court ruled that the landlord was entitled to receive the licence fee payable to the administrators, the landlord had already conceded that it was not entitled to the whole amount of the rent as an expense of the administration, and in this way, Innovate turned very much on its own facts.

The court in Nortel noted that the Lundy Granite principle was not considered in Innovate. It held that the court might have a discretion as to whether or not to allow forfeiture (or other) proceedings to be brought. However, there is no discretion to declare something to be or not to be an expense of the liquidation or administration (as the case may be). This falls to be determined under the insolvency rules and the Lundy Granite principle. On that basis, the administrators were liable to pay the rent as an expense of the administration.

Things to consider  

This is a definite win for landlords.

Before this clarification, administrators were able to give minimal thought at the outset of an administration to landlords of premises they wished to occupy and could wait for landlords to argue their position or to take enforcement action (see Terminate to Accumulate?).

Administrators will now have to factor the cost of leasehold premises into their strategy from the beginning, ensuring that the company has sufficient assets to pay the rent due. This does not guarantee that the rent will be paid on time but the key point for landlords is that the rent will rank as an expense of the administration, i.e. it has to be paid in full before the administrators' own costs are remunerated.