Many landlords are experiencing the difficulties caused by tenants going into administration. Often their administrators seem to ignore landlords’ interests and lease terms when putting pre-packs together and many let the buyers of the insolvent business into the premises under informal licence arrangements, putting the landlord entirely at the administrators’ mercy when it comes to the payment of rents. If they’re lucky, administrators will offer to pay rent on a monthly basis in arrears.  

Landlords are struck by how inappropriate it is that a tenant’s administrators can ignore the tenant company’s lease obligations in looking after the interests of the creditors. The reason for the administrators’ ability to ignore the lease is the moratorium that a company in administration benefits from so that creditors cannot continue to exercise their usual range of remedies against the company in administration and this includes landlords.  

This note deals with two topics that might help the beleaguered landlord. There are other issues when tenants go into administration and if you need specific legal advice on administration please do get in touch.  

Pre-pack Administrations

A pre-pack administration is one method of selling the business/assets of a company using administration. Often it involves insolvency practitioners approving a management buy-out of the profitable parts of a tenant company the instant the tenant company has gone into administration. This has been much criticised in the last year. The process is intended to be for the benefit of the creditors as a group and is often justified because it will save large parts of a business (and many jobs) but it has been criticised for foisting unacceptable tenants on landlords and being biased. As a process it was in need of more credibility.  

In the face of widespread criticism, the Association of Business Recovery Professionals issued guidance in January as to how pre-packs should be dealt with, specifying the information landlords should be given when pre-packs are proposed. Transparency is encouraged. The Landlords are entitled to background information about a pre-pack and reasons for the decision to transfer the business that way. The Guidance is in a Statement of Insolvency Practice (No. 16).  

The latest development on this score is that the Insolvency Service has set up a process of regulation to ensure compliance with SIP 16 and anyone who considers that a pre-pack has been misused is encouraged to complain. Details as to how can be found at: http://www.insolvency.gov.uk/howtocomplain/complainprepack.htm.   

The Insolvency Service is working with the various regulators of administrators to ensure that SIP16 is put into practice and they are hoping to take enforcement action to disqualify directors who misuse the insolvency process. That does not compensate a landlord for loss but may improve the pre-pack process.

Solvent Undertenants

For over a century landlords have been able to require undertenants to pay rent direct to them where their own tenant was in rent arrears. The remedy was enshrined in Section 6 of the Law of Distress Amendment Act 1908.

A Loophole?

It is easy to forget the wording of the 1908 Act and just deal with the process it enabled. The Act is worth a second look. What the 1908 Act does is deem the sub-tenant who is paying direct to the landlord to be the immediate tenant of the landlord and the sums paid to be rent. This notionally ends the existing sub-lease.  

Tenants’ administrators in receipt of sub-lease rents may be disappointed by landlords using this remedy but it is deemed to create a landlord/tenant relationship directly between the landlord and the sub-tenant. Landlords can argue that the moratorium relevant to the administration of the tenant company is outside the scope of the deemed landlord tenant relationship.

There have been no cases to test this out but older cases relevant to receivership are supportive of the principle that landlords can exercise this remedy post administration without involving a court order (or the consent of the administrator).

Licences to occupy

Administrators often grant unauthorised licences to occupy premises with little concern for there being a successful claim against them for a breach of the lease by their landlords. The occupier is often a new company. Administrators have been helped by last year’s court case of Sunberry Logistics v Innovate and as long as they can show they were acting for the benefit of the creditors as a whole in granting a licence to occupy, the landlord just has to wait to receive some rent. The big unknown is when that will be paid.  

Many licences to occupy, in fact, could be held to be leases. It is all too easy to show that the occupant has exclusive possession of the premises and that the licence fee was a rent. Some landlords lacking any other tenant interest may be prepared to accept the licensee as a sub-tenant for a short term and take rent payments direct using section 6.

It is not possible under the 1908 Act to use section 6 for an underlease or licence to occupy granted in breach of the headlease terms so perhaps landlords should think about consenting to occupation by the temporary occupier to keep section 6 alive. Landlords need to be aware that this could be attacked by the administrator, as it would be stretching the law somewhat, but in the world of insolvency, ‘a bird in the hand….’. It may be tempting to try to get the rent paid direct and then wait and see if the administrator takes any action to recover it.  

Advantages

Tenant company administrations can be frustrating to landlords and a self-help remedy is often attractive. It will be beneficial to a landlord where a surplus property has been partially sub-let pre-administration or sub-let with consent during the administration. It may create a cash flow advantage where the administrator lawfully lets someone in to trade from the property as it will save the landlord waiting for a payout as an expense of the administration. It may be used even where the administrator has granted a licence to occupy without consent, at least as a tactic to ensure the administrator cannot just ignore the landlord.  

We will have to wait and see if any administrators find grounds for challenging it but for now for landlords section 6 may help them in these difficult times more than they thought.  

Conclusion  

There are many restrictions that arise when a tenant goes into administration and this note does not try to address them all. The real estate team provides investor clients with a free workshop on tenant default and insolvency which covers a wide range of topics. Where there are undertenants of the premises landlords may still be able to use section 6 notices and divert the sub-lease rents so that they are paid direct even after the tenant has gone into administration.