The insolvency legislation has laid the foundations for a rescue approach towards companies, which are facing insolvency. One such regime is administration. The administrator is sometimes referred to as the "company doctor". The administrator is given extensive powers to administer the affairs of the company in order to save the company from being wound up or at least, to maximise the financial position for the company's creditors. A landlord is one of the company's creditors however a landlord's position is often more compromised than many other creditors bearing in mind that much of a landlord's losses are future losses. It is also often the case that a landlord is not able to regain its property and mitigate its losses, in the early stages of a tenant being in administration.

The rescue approach means a company in administration is granted a moratorium, during which period the tenant's assets are protected from any claims by creditors, including landlords. In addition, if the administrator requires to make use of the property in relation to its purposes, the landlord is not always entitled to exercise its proprietary rights. The administrator is required to pay the rental payments due under the lease in order to continue in possession of the lease and the landlord would only be entitled to recover the property in the event of non-payment of rent by the administrator.

The recent case of Innovate Logistics Limited (In Administration) v Sunberry Properties Limited [2008] EWCA Civ 1321 arose from a dispute over the implementation of the administration process. The Court of Appeal made its decision based on what was concluded to be the purpose of the administration.

The Facts

Sunberry Properties Limited, the landlord, leased premises to Innovate Logistics Limited for a term of 30 years from 1998. The current annual rent was £1,225,530. The business was storage and distribution of frozen foods. The lease was in reasonably standard commercial terms and included the right of landlords to recover possession in the event of a breach of covenant.

A petition to wind up the tenant company was presented to Court, but was dismissed. Instead, Innovate Logistics Limited went into administration on 30th June 2008. The administrators appointed, granted a temporary occupational licence to the buyer of the company's business under an earlier agreement with a potential purchaser. The landlord objected to this licence and sought an order for the immediate termination of the occupational licence. The order was granted but the judge also gave the company (in administration) the right to appeal. The appeal took place in November 2008.

The Court of Appeal permitted the admission of fresh evidence that had been omitted at the time of the initial hearing. The particular piece of evidence provided an explanation as to why the administrators had granted the licence on a temporary basis to the buyer of the company's assets. The trial judge had not been aware of this and had assessed the situation partly on the basis that the administrators' actions had been underhand.

It was apparent from the evidence that the short term licence was part of the "pre-pack administration" agreement, which involved early agreement of the sale of the company's business as a going concern (but not including the company's debts) in order to achieve the purpose of the administration. The purpose of the administration, however, also included the collection of all debts due to the company. Temporary occupation provided the opportunity to gather in, thus increase, the assets of the company for the purposes of distribution to creditors. Sunberry Properties Limited as landlord, had been aware of the negotiations between the administrators and the potential buyer of the company (in administration) prior to the administration order being granted. The Court of Appeal's decision was to allow the appeal of the company (in administration), and permit the short-term licence to stand.

During the period of the short-term licence the buyer continued to pay the rent. It was argued that if the short-term licence had not been permitted and the company not sold to the buyer, the company would have been in liquidation and would have been unable to pay the rent. This would have been a worse position from the point of view of recovering any potential assets in order to repay the extensive debt due to creditors and the landlord may not have received any rent.  

The Decision

The decision was reached against the background of the administration and the statutory moratorium. The burden was on the landlord to prove that it was inequitable to permit the insolvent tenant to appeal against the decision to terminate the licence. In reaching a decision, the Court was required to "conduct a balancing exercise of the legitimate interests".

Much of the decision hinged on the meaning of what was "the purpose of the administration". The trial judge had made the decision that the purpose had been achieved at the time of the sale of the business. He did not take account of the fact that one of the main purposes of the administration was the continual collection of book debts to meet the debt due to the various creditors of the company. It was for this purpose that the purchaser required occupation of the property on a short-term basis and it was regarded as sufficient balance of interests between the creditors and the company that the lease rental payments would be made during the period of occupation. Further, it was not an option to follow the landlord's position that the buyer should be required to enter into an assignment of the lease. It would have been a sway in favour of the landlord had the buyer been made to replace the short-term licence with an obligation to carry on the lease for the balance of the term of approximately twenty more years.

Conclusion

The main concern from this case is impact on landlords. In the first place the landlord is not able to rely on the contractual terms of the lease once the tenant is in administration. The fragile nature of all concerned is apparent in the balancing act between a company in administration, landlords and other creditors. In this case, the property was the only asset of the landlord company and it has recently been reported that the landlord itself is now in administration also.

In the current economic climate it is highly likely that there are going to be many more casualties of this nature. Licence insolvency practitioners will require more rigorous application of the rules in order to ensure the fairness and continued balance of interests of all concerned. The rules affecting "pre-pack administrations" may well be brought into question to ensure compliance with the rules is transparent. Bearing in mind the complex nature of insolvencies and the different remedies available, it is certainly an area that will require expert consideration at an early stage.