Many commercial landlords will currently be dealing with issues arising out of their tenants' financial difficulties, in particular the impact of insolvency proceedings. For tenants who are in administration, a moritorium applies, which will prevent a landlord taking action against the tenant without leave from the Court. Generally, the Courts will have a degree of sympathy for landlords, and will afford significant weight to the landlords’ proprietary rights when deciding whether to allow landlords to commence proceedings against a tenant.

However, the recent Court of Appeal case of Innovate Logistics Limited (In Administration) v Sunberry Properties Limited [2008] EWCA Civ 1321 demonstrates the balancing act that the Courts will perform when a landlord seeks to have the statutory moratorium lifted so that it can enforce its proprietary rights against a tenant in administration.

The moratorium

Since 2003, the appointment of administrators to a company has become relatively straightforward and inexpensive for the directors of the company or the holder of a floating charge over a company’s assets. All that is needed to effect the appointment is for a set of documents to be filed with the appropriate Court. When a company enters administration (or indeed when the directors of a company or a floating charge holder lodge a notice indicating that an appointment is anticipated once the necessary consents are obtained) this gives rise to a moratorium which prohibits action being taken against the company and its assets.

The moratorium means that, unless either the company's administrators or the Court gives consent, legal proceedings may not be commenced or continued, secured creditors may not enforce their security, owners cannot repossess goods which are subject to hire purchase or similar agreements, and landlords may not enforce their right to forfeit or irritate the lease. The moratorium is intended to give the administrators some breathing space as well as helping to achieve the purpose of the administration.

The purpose of the administration

Administrators must perform their functions in respect of a company to which they are appointed with a view to achieving one of three objectives. In order of priority, the objectives are:

  • rescuing the company as a going concern;
  • achieving a better result for the company's creditors as a whole than would be likely if the company were wound up; and
  • realising property in order to make a distribution to one or more secured or preferential creditors.

The objectives are hierarchical, which means that the administrator may only aim to achieve the second objective if the first objective is not reasonably practicable, and he may only perform his functions with a view to achieving the third objective, if the first and second are not reasonably practicable.

In seeking to achieve whichever of the objectives is appropriate, administrators have an over-arching requirement to have the best interests of the creditors as a whole firmly in mind.

Tenants in administration

Landlords faced with a tenant in administration usually have two distinct types of claim:

those with a monetary value, such as unpaid rent and all other financial claims arising under the lease; and proprietary rights to protect and/or claim back possession of their property. The administration moratorium prevents landlords exercising their rights or pursuing their claims. This can be frustrating for landlords, particularly when the tenant grants a licence to occupy the premises without the landlord's consent and the landlord cannot take action on this breach without first seeking leave of the Court (assuming, as will usually be the case, that the administrators refuse consent).

The approach taken by the Courts

The Courts will show due respect to the rights of landlords who find themselves faced with the consequences of a tenant in administration, so that proprietory rights are a significant factor in the Courts' consideration of an application by a landlord to raise an action against the tenant.

Landlords should not think however that leave to proceed with court action will be granted automatically, as the case of Innovate Logistics Limited (In Administration) v Sunberry Properties Limited highlights.

Landlords rights v Purpose of the administration

Sunberry, the landlord, wished to commence proceedings to terminate a licence to occupy granted by its tenant, Innovate, acting through its administrators. Both the granting of the licence and Innovate’s parting with possession of the premises constituted a breach of Innovate’s lease with Sunberry, which was in broadly standard commercial terms, for a term of 30 years from 1998, and included the right of Sunberry to recover possession in the event of a breach of covenant. The annual rent at the time of the dispute was a not insubstantial £1,225,530.

Innovate went into administration on 30 June 2008, and shortly afterwards, the administrators granted a temporary occupation licence to the purchaser of Innovate’s business of storage and distribution of frozen foods. The purchaser did not purchase Innovate's interest in the lease, and did not wish to lease the premises long term.

Sunberry objected to the licence and, when the administrators refused consent for the action to be commenced on the basis that the continued occupation of the premises by the licensee was necessary for the purposes of the administration to be achieved, sought an order for immediate termination of the licence. The order was granted but Innovate appealed.

Prepack administration

The licence granted by Innovate was part of a “prepack” sale agreement. A prepack sale involves the sale of a company's business as a going concern at an early stage of an administration (usually on day one). The purpose of the administration of Innovate was in part achieved by the conclusion of the prepack sale, but the continued collection of debts due to Innovate also fell within the statutory purpose of the administration, as this would significantly increase the pot of money available for distribution to Innovate’s creditors.

The purchaser was assisting in the collection of those debts, which had a value in excess of £8 million, and occupation of the premises for the period of the licence was required to enable the purchaser to do so.

During the period of the licence the purchaser continued to pay the rent, although on a month-by-month basis rather than quarterly in advance as provided for in the lease, so Sunberry's position was not significantly prejudiced. Sunberry did not have a new tenant lined up and was not looking for leave to forfeit the lease. In fact, Sunberry admitted that its aim in bringing the action against Innovate was to improve its bargaining position with the purchaser in the hope that the purchaser could be persuaded to take an assignment of the lease after all.

Burden of proof rests with the landlord

In any situation where a landlord seeks to be allowed to bring proceedings against a tenant in administration, the burden will fall to the landlord to prove to the Court that it would be inequitable not to sanction this. In reaching a decision, the Court is required to “conduct a balancing exercise of the [landlord's and tenant's] legitimate interests", and if the bringing of proceedings is likely to impede significantly the purpose of the administration, then it is less likely that the Court will give permission.

Much of the decision in this case hinged on the meaning of “the purpose of the administration”. The original trial judge had concluded that the purpose had been achieved at the time of the sale of the business as a going concern. But his attention had not been drawn to certain relevant evidence, so he did not take account of the fact that the purpose of the administration would be achieved by the continued collection of book debts. As the rent was being paid to Sunberry, and the book debts continued to be collected, the Court of Appeal found that the balancing exercise favoured the interests of Innovate’s creditors, and refused permission for Sunberry to bring proceedings to have the licence terminated.

A balancing exercise

Given the specific facts of this case, the decision is not surprising. Sunberry was put in no worse a position by the granting of the licence to occupy and, in fact, rent was being paid by the purchaser during the licence period, which Sunberry would otherwise have had to claim from Innovate as an unsecured creditor. Innovate’s creditors, on the other hand, were likely to be put in a better position if the licence was allowed to continue.

Despite this decision, landlords can still draw comfort from the likelihood that, when a tenant enters administration and continues to occupy the premises or grants a licence to occupy to a third party, the Court will wish to protect the landlord’s proprietary rights where possible, and may allow the moratorium to be lifted to provide the landlord the opportunity to exercise those rights.

Administrators, as officers of the Court, are aware that they should not abuse the moratorium and, in appropriate circumstances, should give consent to action being taken by landlords. Failure to do so will result in the risk of an adverse costs order against the administrators.

Generally, however, if rent is being offered, whether by the tenant or a licensee, the landlord will be well advised not to make a hasty challenge to the moratorium. If no rent is being offered, any application to Court may well find favour.

Before taking any steps however, the landlord should gather as much information as possible about the role the property plays in the administration and the administrator's intentions for it. The landlord should, preferably after taking legal advice, enter into correspondence clearly setting out its position which will help the landlord, whether in negotiating a satisfactory way forward, or assembling its arguments for any Court application.