In the current recession landlords are among the fi rst to lose out when a company goes into insolvency, be it a pre-pack sale or a conventional administration process. It is important, therefore, for landlords to know what rights they retain when confronted with the administration of their tenant in order to ensure the full rent is paid - if they are still entitled to it - or, at the very least, to increase their bargaining position. In this article, we look at the circumstances where an administrator is obliged to pay the landlord’s rent in full.
A recurrent problem in today’s economy is that of tenants going into administration. If market rents are lower than the passing rent under a lease, landlords will hope that the administrator will use the premises as part of the administration and pay the full rent as an expense of the administration, ie on the due date and at the full amount (100 pence in the pound). In the absence of some other recourse, such as access to a rent deposit, if a landlord cannot establish that the rent is an expense of the administration he will be classifi ed as an unsecured creditor and only be entitled to receive some distribution from any general unsecured assets which might be available in the insolvency – this will be less than 100 pence in the pound.
Is rent an expense?
The defi nition of administrators’ expenses are found in the Insolvency Rules.1 These provisions, however, require interpretation and whether the rent falls within them depends on what stance the administrator takes towards the premises which are subject to the lease. If an administrator knows from day one of his appointment that the business must be sold (including the lease), rent is highly likely to fall within the statutory defi nitions from the very start of the administration. However, if the administrator delays in deciding what should be done with the premises, a landlord and his advisers must look more closely at what the administrator has been doing with them prior to him formulating his decision.
A good example to take, because it is an extreme case, is whether the mere storage of goods on the premises obliges the administrator to pay the landlord his rent in full.
Expenses “properly incurred by the administrator in performing his functions in the administration of the company” are “allowed” (the administrator can pay them in full – ie, 100 pence in the pound). The administrator’s “functions” are a combination of his powers and obligations which must refl ect the objectives that he believes can be achieved. In descending order of priority these objectives are:
- rescuing the company as a going concern
- achieving a better result for the company’s creditors as a whole than a liquidation would produce
- merely realising the company’s property for distribution to one or more secured or preferential creditors
It is vital to know what and when the administrator decides
The use to which the administrator is putting the premises has to be considered at each stage of his decision-making process. The moment he decides to attempt to rescue the company as a whole, it is likely that using the premises as storage is classed as part of performing his functions and, therefore, the rent charged for their use will be an allowable expense of the administration. Similarly, if he decides on the lesser objective of trying to achieve a better result for the company’s creditors than on liquidation, if the stored goods are to be sold along with other parts of the business, again, the rent will be classed as an expense from the time he makes that decision. Finally, if he decides that neither of the above objectives can be achieved and all he can do is sell the company’s property for the benefi t of preferential or secured creditors, if the stored goods are part of the property he tries to sell, on the face of it, the premises have been used for the purposes of the administration. Again, rent is payable as an expense.
When would rent not be an expense?
Situations where storing goods on the premises do not amount to the administrator performing his functions for the purposes of the administration and, therefore, the rent not being an expense (ie not payable as to 100 pence in the pound) would be:
- the administrator discovering that the goods stored do not belong to the company but, for example, are subject to a valid retention of title clause and are therefore the supplier’s property
- if the administrator only made the decision that he wished to sell the business some time after his appointment, the period prior to him making the decision may well not amount to him using the premises for the purposes of the administration. One reason why he might not make his decision at the outset could be that he was taking legal or other advice before so doing. The rent due during that initial period arguably would not amount to him using the premises for the purposes of the administration
There are, of course, many other examples of the administrator using premises, apart from storing goods. Each of the ways in which the premises are used would have to be considered in the context of all the examples set out above. Because each case will be factspecifi c, it is important to fi nd out the precise manner in which the administrator is treating the premises and the timing of his decisions concerning how to deal with the company and its assets. In this way, with the help of their legal advisers, landlords will be able to determine if the premises are being used as part of the administrator performing his functions, in which case the landlord’s rent will be payable 100 pence in the pound.