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What are the options for landlords when their tenants enter administrationBy: Jason Sheard, Partner, SNR Denton

Jason Sheard, SNR Denton
There has recently been a spate of high profile retailers entering administration and in today’s economic climate landlords are often at a disadvantage when a tenant enters into administration, as they face difficulties safeguarding their rental income.

Rent as an expense
Many landlords worry about claiming rent (due under the lease) as an expense of the administration. Why does it matter if rent is treated as an expense? If it isn't, a landlord can only bring an unsecured claim against the insolvent tenant's assets and is likely to get nothing . If rent is an expense, it is paid as an expense of the administration out of the realisations (and ahead of other creditors).

The leading insolvency case (which determined when rent should be considered an expense) is Goldacre (Offices) Ltd v Nortel Networks UK Ltd (in administration) (2009) EWHC 3389 (ch) which focussed on whether administrators must pay rent where they caused an insolvent company to occupy property for the “purpose of the administration”. The judge decided that, where administrators use premises the rent is payable by them (as an expense) as it falls due.

Leisure Norwich (II) Ltd and others v Luminar Lava Ignite Ltd (in administration) and others (2012) B.C.C 497 reinforces this. Administrators were appointed over Luminar (which operated nightclubs). Following the administrators’ appointment a number of the landlords asked the administrators for permission to forfeit the leases and to pay the rent in the meantime.

The administrators objected to the landlords forfeiting the lease and an argument ensued about the payment of the rent. The landlords demanded full payment of September 2011’s quarter rent, which became due before the administrators were appointed. The landlords added that, if they could not forfeit, then all rent should be paid under the normal rule that a tenant must meet all arrears to avoid forfeiture. The judge considered the legal arguments and, in reaffirming the Goldacre principles, stated that:

  1. Rent payable in advance that falls due before the administration is not payable as an expense. This applies even if the administration starts part way through the quarter (or even the day after) and the administrators use the property during that period. In this scenario, a landlord can only bring an unsecured claim for the quarter's rent and will not get priority payment as an expense.
  2. Where the rent date falls during the period when the property is being used by the administrators, all that rent is payable even if the administrators vacate later during the quarter.

Forfeiture and the moratorium
Where tenants fail to pay rent, breach a covenant or become insolvent, the landlord is permitted to bring forfeiture proceedings (subject to tenant’s right to relief from forfeiture). However, where a tenant is in administration, premises are not required and rent is not being paid, administrators will often give their consent to forfeiture proceedings being brought or surrender the lease. But what if a landlord wants its lease back sooner or the administrators are prevaricating? In this scenario, a landlord’s ability to forfeit a lease is fettered due to the statutory moratorium imposed under The Insolvency Act 1986 on the administration of a company, which prevents a landlord:

  • Forfeiting the lease (by peaceable re-entry or otherwise) 
  • Commencing any legal process against the tenant without either the consent of the administrators or the permission of the Court.

The moratorium aims to give a company respite while proposals are put to its creditors and to prevent creditors from depriving an administrator of possession of property, which may be required for the administration. If a landlord wants to forfeit, how can it overcome the moratorium?

Atlantic Computer Systems plc [1992] Ch. 505 

This case laid down the guidelines as to when a Court should give its permission or leave to a landlord to bring forfeiture proceedings:

  • If the landlord seeks to exercise a proprietary right which is unlikely to impede the achievement and purpose of the administration, then leave should be given;
  • If the exercise of the right will impede the purpose of the administration the Court should undertake a balancing act between the landlord’s interests and those of the other creditors; and
  • Greater importance should be given to the landlord’s proprietary interests.

The following two cases demonstrate the application of these principles by the Courts.

Metro Nominees (Wandsworth) (No 1) Ltd v Rayment [2008] B.C.C 40
In this case, the Court held that, if the main purpose of the administration has been satisfied and the administrators are simply acting as front-men (for example, where the lease itself has no further value or benefit to the creditors) then leave is likely to be given. In Metro, the business had been sold (and all value obtained) and the purchaser (of the tenant’s business) was occupying the premises under a licence. The lease was also of nominal value. In light of these facts, the Court’s view was that no prejudice or loss would be caused to the creditors and so leave was granted. The judge also pointed to other factors which may support a landlord's case for the grant of leave:

  • The existence of rent arrears
  • The conduct of administrators (ie whether they had been open with the landlord regarding the licence to occupy)
  • The covenant strength of any proposed assignee and guarantor.

Sunberry Properties Ltd v Innovate Logistics Ltd (in administration) [2008] EWCA Civ 1321
Here, the administrators had sold the tenant’s frozen food warehousing business to a third party and allowed it to occupy the premises on a licence basis. One of the key aims of the administration was to ensure the collection of book debts. In order to do this, the buyer of the business needed to occupy the premises and take over and perform certain customer contracts (by storing and distributing frozen goods). As a result, the Court carried out a balancing act and held that the interests of the creditors outweighed the interests of the landlord. Leave was therefore denied.

The bottom line appears to be that, if it is evident that the grant of leave will impede the purpose of the administration (and the premises are required) then the interests of the creditors will be preferred to those of a landlord and leave will not be granted.

Other ways to recover rent/arrears
If a landlord cannot recoup rent from the administrators, it should consider the following: 

Guarantees There may be a guarantor under the lease or an authorised guarantee agreement (given by a previous tenant of the lease) from whom it can claim rent moving forward.

Old Leases If the lease is an old lease for the purposes of the Landlord and Tenant (Covenants) Act 1995 (pre-dating 1 January 1996) the original tenant could be liable for the rent

Section 6 of the Law of Distress (Amendment) Act 1908 This entitles a landlord owed rent under a lease to serve notice on the tenant’s sub-lessee requiring it to pay rent to the landlord rather than to the tenant. This often enables landlords to recover rent due from their immediate tenants (via a sub-lessee).

Rent deposits Landlords shouldn’t give up hope if the moratorium stops them drawing down on a rent deposit. If the rent deposit is a secured financial collateral arrangement the landlord can call on the rent deposit despite the moratorium being in place. Future rent deposits should also be structured to ensure they are secured financial collateral arrangements.

Dealing with administrators – points to consider
Landlords should ask the administrators to confirm their intentions for the premises, including the following points below:
If confident premises can be re-let, landlords could seek to negotiate a surrender of the lease. If re-letting is unrealistic, it could be more prudent to leave the lease (and the business rates liability) with the administrators rather than surrender and find it is liable for rates itself.
Application to Court
Where landlords can re-let, they could apply for the Court’s permission to lift the moratorium and bring forfeiture proceedings. This is quite an aggressive tactic but may focus the administrators’ minds on whether they need the premises. If so, they may pay the rent to avoid a Court granting leave and the potential forfeiture of the lease. A Court is more likely to grant leave where administrators are not paying the rent as the landlord will suffer greater loss if it is not receiving rent for premises occupied by the administrators.
Administrator duties
Administrators have a duty to obtain the best deal for the creditors of the tenant. They do not have to pay the rent, unless it is an expense under Goldacre or if it is in the creditors’ best interests. They may pay it if they need the premises and this is worth exploring.
Assignment of a sub-lease
Premises can be important to a tenant’s business and a future purchaser may require them to trade the business it acquires. Therefore, the administrators are likely to pay the rent to secure the premises.

Landlord’s consent
A landlord cannot unreasonably withhold or delay its consent to an assignment of a lease although this may not prohibit it from imposing conditions, if it says in the lease, that all arrears due under the lease must be paid in full before the landlord grants its consent. A lease should always be checked to ascertain whether it contains such provisions. If it is silent, it may not be reasonable to insist arrears are met.

About the author

Jason Sheard is a partner at SNR Denton. He has extensive experience of restructuring and insolvency work and has advised insolvency practitioners and banks on a number of high profile insolvency transactions. He also specialises in real estate finance, corporate real estate, investment work and landlord and tenant matters, acting for banks, investors, landlords and tenants. Jason was part of a team, which recently raised £4,500 by growing a moustache for Movember.

Features January 2013

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