Case considering whether rent which accrued during an administration was payable in full as an expense of the administration or whether payment was a matter of discretion for the court.

The Council were landlords of premises on High St, Worcester and Springfield Retail Ltd were tenants. On 25 March 2008 administrators were appointed for Springfield. The administrators entered an agreement with Art Retail Limited and Moorswater Properties Limited which involved a sale of Springfield’s business to Art and a licence to occupy the Worcester property in favour of Moorswater Properties Limited. (The licence was granted despite a provision Springfield’s lease preventing underletting, parting with or sharing possession of the property).

Moorswater took occupation of the property around 19th May 2008 and on 23rd May 2008 the administrator wrote to the Council advising of the business sale, the licence and seeking an assignation of the lease. They also advised that Art would be responsible for rent after 19th May. The council replied requesting further information before the granting of the assignation. The information was not provided and the assignation was never agreed. The administrators then wrote to the Council on 20 November 2008 advising that, as no assignation had been signed, the licence terminated as at 18th November 2008. The letter also advised that the administrators were not personally responsible for rent after 18th May 2008 and recommended that the Council take steps to recover possession of the property. The Council terminated the Lease by changing the locks (which had effect by English law) on 14 May 2009. The Council petitioned the Court for an order ordering the administrators to payment of the sums due under the lease to them as an expense of the administration in terms of the Insolvency Act.

The administrators argued that, while there is a line of English Authority to the effect that where a liquidator has occupied premises for the purposes of a liquidation, rent is payable as a liquidation expense, in this case there were two distinguishing factors: (1) the administrators themselves had not been in occupation since 2 May 2008 and the rent was payable by Moorswater (2) the courts adopt a more flexible approach in administrations than in liquidations (in line with the “rescue culture” which pervades an administration).

They also argued that the Council had not suffered unfairly as landlords as they had had the opportunity to either obtain a speedy assignation or regain possession of the property immediately and had not done so.

Lord Menzies disagreed with the administrators arguments and found that, although he was attracted by the flexible approach to administrations, changes to the Insolvency Rules made since the court decisions indicating a discretionary approach, meant that expenses in administrations were now to be treated in the same way as liquidations (i.e. such expenses are considered exclusively by reference to the insolvency rules and if rental liability falls within the rules it will be payable as a mandatory obligation).

Lord Menzies went further and said that, even if this view were wrong and the court did have discretion, he would have exercised the discretion in favour of the Council and found that the rent was payable as an expense of the administration. The factors which would have influenced this decision were:

1. the administrators allowed a third party to occupy the premises in flagrant breach of the lease;

2. they did so without giving the Council any prior notice of their intention to do so;

3. they allowed the occupation to take place without an executed licence or personal guarantee

4. there was no method of enforcement of payment of rent in the (unexecuted) licence (either by the Council or the administrators);

5. the administrator’s failure to respond to the landlords reasonable requests for information as to the potential assignee.

As a result Lord Menzies took the view that the administrators had paid insufficient regard to the Council’s legitimate interests and did not think the Council could be criticised for requesting further information regarding the potential assignee rather than immediately terminating the lease.

Scottish Courts, 13 August 2010