In a very welcome decision for landlords, the High Court has ruled that administrators must pay rent as an expense of the administration where the company uses leasehold property for the benefit of creditors. This means that the landlord will move to the front of the queue of the company’s creditors.

Background

Landlords have suffered particularly badly during the recession as large numbers of tenants have gone into administration and stopped paying rent. As unsecured creditors, and with little likelihood of finding an alternative tenant to take the premises in the current poor market, it seemed there was little landlords could do to improve their position. Even if a new tenant could be found, the insolvency rules prevent the landlord from taking proceedings to forfeit the lease without the consent of the administrators or the court. The court has a discretion in such cases and if the company needs to occupy the premises to achieve the purpose of the administration, the court must weigh the interests of the landlord against those of other creditors and the landlord may lose out. That is what happened in the case of Innovate Logistics (in administration) v Sunberry Properties Ltd, which we reported on in the spring 2009 edition of Real World, where the court refused the landlord leave to bring proceedings to enforce the tenant’s covenants.

Rent as an Administration Expense

However a case decided at the end of last year, Goldacre (Offices) Ltd v Nortel Networks UK Ltd (in administration), redresses the balance in favour of the landlord. The High Court decided that where the company continues to use the premises the rent payable falls within the category of “necessary disbursements” under the Insolvency Rules and must therefore be paid as an expense of the administration. As a result the landlord’s claim for rent will take priority over the claims of other creditors without any need for the court to exercise its discretion or to balance the landlord’s interests against those of other creditors.

Use of the Premises

The obligation to pay the rent arises only if the premises are being used. So if the business closes and the premises are vacated, further rent payments will not qualify as an expense of the administration. A purchaser of the business is sometimes allowed into occupation of the premises as licensee pending the assignment of the lease. It is thought likely that such occupation by the purchaser would qualify as use by the company for this purpose.  

No Apportionment

The administrators in the Goldacre case tried to argue that they should pay only a proportion of the rent because the company was occupying only a small part of the premises. However the court made clear that it had no jurisdiction to apportion the rent and it must be paid in full. In the same way there will be no apportionment if the company’s use of the premises ends part way through a rent payment period; rent for the whole period must be paid. However rent which fell due for payment before the administration began will not rank as an expense of the administration. Only rent actually falling due while the company is in administration and using the premises is covered.

Other Payments

The Goldacre case deals only with the payment of rent. However the same principle ought also to apply to other sums payable under the lease, such as service charge and insurance payments.