It seems counter-intuitive, but if a tenant company is in administration, it is probably in the landlord’s interest for rent to be payable monthly, or even weekly, rather than quarterly in advance.  That is a consequence of the principle, which was confirmed by the High Court in April this year in the case of Leisure Norwich (II) Ltd v Luminar Lava Ignite, that outstanding rent which fell due before the company went into administration cannot rank as an expense of the administration.  The problem is that landlords generally prefer rent to be payable quarterly in advance as long as the tenant is not in administration.  However, a solution may be available in the drafting of the lease, as explained below.

The problem

Landlords are unsecured creditors of their insolvent tenants and, as such, are at the back of the queue for payment of debts such as rent arrears.  However, they move right up to the front of the queue if the rent amounts to an expense of the administration.  In 2009, landlords welcomed a High Court decision, Goldacre (Offices) Ltd v Nortel Networks UK Ltd, that, where the tenant continues to occupy the premises to further the interests of creditors, rent falling due in the course of the administration does rank as an expense.  But the Luminar case, mentioned above, made clear that timing is crucial – unless the company is in administration and occupying the property on the rent payment date the rent will not count as an expense of the administration.  The result is that administrators appointed just after a quarterly rent payment date can occupy for nearly three months rent free.

An example

The following example illustrates the problem:  If rent of £48,000 per annum is payable quarterly in advance, administrators are appointed on 23 June and the company continues to occupy the premises until 28 September, the landlord can claim £12,000 rent, falling due on 24 June, as an expense of the administration.  But if the administrators are appointed just a couple of days later on 25 June, none of the rent can be claimed as an expense.  By contrast, if rent is payable monthly on the first of each month, rather than quarterly, then whether the administrators are appointed on 23 or on 25 June the landlord can still claim £12,000 (£4,000 on each of 1 July, 1 August and 1 September).

A solution

We have sought to deal with the problem through the drafting of the lease.  The wording which we have adopted seeks to give the landlord the best of both worlds.  The lease provides for rent to be payable quarterly in advance, but it allows the landlord to switch to rent payable weekly, with effect from the preceding rent payment date, if the tenant goes into administration.  (Obviously if the quarter’s rent had been paid then the landlord would choose not to exercise the right to require rent to be paid weekly when the tenant went into administration.)  The provision is so far untested and, of course, it cannot assist for existing leases, unless the tenant agrees to a variation, but it is perhaps the solution for future leases.

Source:  Leisure Norwich (II) Ltd v Luminar Lava Ignite [2012] EWHC 951 (Ch); Goldacre (Offices) Ltd v Nortel Networks UK Ltd [2009] EWHC 3389 (Ch)