The case of Goldacre v Nortel, decided in December, has clarified the circumstances in which an administrator is liable to pay rent under a lease as an expense of an administration. If rent is an expense of the administration, the landlord will almost certainly be paid in full for as long as the administrator uses the property. If it is not such an expense, the landlord will be an unsecured creditor who will be lucky to receive a few pence in the pound. In his judgement, His Honour Judge Purle QC also clarified a couple of other issues that have arisen between landlords and administrators.
Nortel leased premises from Goldacre. Nortel went into administration. The administrators only occupied a relatively minor part of the property in order to carry out their duties as administrators. The administrators argued that the rental payments they made should be tailored to the use that they were making of the property so that only a proportion of the rent payable each quarter under the lease should rank as an expense of the administration. Goldacre disagreed, saying that all the rent payable each quarter under the lease was an expense of the administration.
The High Court agreed with Goldacre and ruled that even if an administrator only uses part of a property, the administrator must pay all the rent on the date due, usually quarterly in advance, as an expense of the administration.
It was suggested that the Court of Appeal decision in the Innovate case could be interpreted so that the judge was required to exercise a discretion to consider how much rent would be fair for the administrators to pay. The judge and both sides in the Goldacre case accepted that he was not bound by Innovate on this point, because the issue of what the administrators should pay in Innovate was adopted as a result of a concession. Having reviewed the authorities, including the House of Lords decision in Toshoku, the judge held that he had no such discretion. He decided "the Court might have a discretion as to whether or not to allow forfeiture proceedings to be brought or to allow distress to issue, but there is no discretion to declare something to be or not to be a liquidation expense. The same principle applies, in my judgment, to administrations".
The Court also held that if a company in administration uses leasehold property for the benefit of creditors, the administrators cannot argue that rent does not become an expense of the administration until the landlord demands it or threatens to seek the Court's leave to forfeit. The judge said "if the rental liability falls within the [insolvency] rules, then it is payable as a matter of mandatory obligation, not as a matter of discretion, either on the part of the administrators or on the part of the court". So the trigger date for rent becoming an expense is as soon as the administrators use the property.
The Court also decided that previous case law on rent apportionments was wrong. As rent is paid under the lease quarterly in advance, the whole quarter's rent becomes payable in full on the quarter day – so if the rent is an expense of the administration and has been paid as such by an administrator who then vacates the property midway through the quarter, the administrator is not entitled to a rebate from the landlord for the period after he vacated.
There is one good piece of news for administrators in the judgment. The judge re-affirmed that if the sufficiency of realisable assets is in doubt the landlord will have to wait and see to what extent the assets will be sufficient to satisfy his claim, even if his claim is properly treated as an administration expense, as there may be other claims also having priority. So there is no right to immediate payment, but the right for the accruing rent to be treated as an expense with the appropriate priority still remains. If the administrator has sufficient funds to pay rent which is an expense of the administration, then he should pay it on the relevant quarter day in accordance with the terms of the lease.
Whilst it has been accepted by administrators that if they occupy a leased property to carry out their duties as administrators they are liable to pay the rent as an expense of the administration, the Goldacre case provides helpful clarification on the timing and the amount of such payments.