In the current economic climate, landlords are having to deal more frequently with tenants who are in administration. Where the administrators of the tenant are using the property for the purposes of the administration, the moratorium on forfeiture and irritancy proceedings that applies in administrations means that the landlords are unlikely to be able to recover the property in order to relet it.

Indeed, the landlord may not be able to find a new tenant in the short term. If one is found, the market rent for the property may be substantially less than the rent due under the existing lease. In such a situation, the best outcome for the landlord (at least in the short term) is to have the rent paid by the administrators.

As the liability of the tenant to pay rent and other sums was incurred prior to it going into administration, the starting point is that such liabilities are ordinary unsecured claims in the administration. The landlord will rank for these with the other ordinary unsecured creditors. Such creditors are unlikely to be paid in full (and in practice there is often nothing available for them) and, if any funds are available for them, they are unlikely to be distributed for a significant period of time.

Administration expenses rank above ordinary unsecured claims

Certain types of liabilities do, however, rank above ordinary unsecured claims. One of these is administration expenses. If a sum is payable to a creditor as an administration expense, that creditor can generally expect that sum to be paid in full and that, if payment is not made when it becomes due, it will be made fairly quickly after that time.

So, when (and how much) rent in relation to a property that administrators are using will be payable as an administration expense? The 2008 decision of the English Court of Appeal in Innovate Logistics v Sunberry Properties had suggested that landlords had no automatic right to be paid rent as an administration expense and that the court should take a flexible approach in any particular case to determining the question. This led landlords and administrators to enter into negotiations as to how much rent would be payable as an expense. These negotiations often had very different outcomes depending on the circumstances of the case.

Is rent an administration expense?

In the recent English High Court case of Goldacre (Offices) Limited v Nortel Networks UK Limited (in administration) a different approach was taken to the question of rent and administration expenses. The main points of the decision are as follows:

  • Where a rent payment date falls within a period during which the administrators are using the property for the purposes of the administration, the whole rental payment will be an administration expense. The Court does not have a discretion. The judge also suggested that, in principle, the same applies to other sums (eg service charges) that become due under the period of use.
  • It is immaterial whether the administrators are only using part of the property and whether they continue to use it for the whole (or only part of) the period to which the rent or other payment relates. The whole of the relevant payment is an administration expense.
  • The administrators do not have to pay the relevant payment on the date that it falls due if they think that the assets of the insolvent tenant will not be sufficient to pay all of the administration expenses in full. Other than in that situation, however, administrators should be making payment on the relevant due date,

Better, but still areas of uncertainty

In general, the Nortel case puts landlords in a better position than was previously thought. There are certain points, however, which require to be clarified and which may form the basis of negotiations between landlords and administrators in the future. These include:

  • What constitutes "use for the purposes of the administration" in any particular case. Only amounts falling due during such use will be administration expenses. In particular, amounts becoming due before the tenant goes into administration, and after the administrators stop using the property will not be administration expenses. Whatever else, it seems clear that where the administrators are actively trading from the property, this will constitute use in the required sense.
  • Where part of the property is sub-let, and one of the sub-tenants does not pay (or is insolvent), the extent to which the rent and other sums that would otherwise be received from the sub-tenant can be deducted from the amount which is payable as an administration expense.

The Nortel case may mean that administrators choose not to trade from properties from which it would have been viable to trade under the previous flexible approach. Where preservation of goodwill in such a property is important to a landlord, it is likely that negotiations will still be entered into with the administrators in relation to the amounts that will be paid as administration expenses.

Finally, landlords should note that the Nortel case applies in administrations of English and Welsh companies - it does not matter where the property is located. The legislation on which the case is based is, however, different for Scottish companies. The Scottish courts have not yet made a decision on the circumstances in which rent will constitute an administration expense under the Scottish legislation. It is unclear whether they would take the same approach as in the Nortel case. We do, however, think that they would consider the Nortel case persuasive if they came to consider the issue.

The decision in the case of Goldacre (Offices) Ltd v Nortel Networks UK Ltd (in administration) is available at the BAILII website.