In these difficult economic conditions, trading administrations continue to cause uncertainty for landlords, especially given the conflicting principles which emerge from the leading cases.
Should a landlord expect to recover rent as an expense of the administration if its property is used for the benefit of the administration? If so, how much rent can be recovered and in relation to what period?
The basics
- The starting point for landlords is once a tenant goes into administration, a statutory moratorium comes into effect which prevents any enforcement action in relation to arrears of rent.
- This means a landlord cannot sue for the arrears, distrain or forfeit the lease without the consent of the administrator or the permission of the court.
- Administrators are obliged to treat some debts/sums owed by the company as expenses of the administration.
- In most administrations (involving, eg, those multiple retailers), there will be some or several properties that the company in administration will cease to use immediately or even shortly before the administration. In those circumstances, administrators do not treat the sums due under the lease as an expense of the administration. This is not controversial and is a position that, if not liked, is accepted by landlords. Any arrears and future sums due will then generally be submitted as an unsecured claim in any subsequent liquidation of the tenant company.
- However, where a store continues to trade and the administrator causes the company to use the store for the benefit of the creditors as a whole, many landlords take the view that the rent should be paid as an expense of the administration. However this position is not always accepted by administrators, and it is also not entirely clear how much rent should be paid, or for what period.
Can a landlord demand an entire quarter's rent even if the company is only in occupation for part of the quarter?
Applying the Goldacre principles – yes.
In the case of Goldacre (Offices) Ltd v Nortel Networks Ltd (In Administration) it was held by the Court that in a situation where:
- the tenant in administration is in occupation of a property for the benefit of the administration; and
- an instalment of rent becomes due (usually on a quarter day)
- then the entire quarter's rent becomes payable, irrespective of whether the tenant is in beneficial occupation of the premises for the entire quarter or not.
"Goldacre has received much criticism amongst insolvency and property lawyers, who believe it has a number of failings."
So, a tenant could go into administration on 24 March, remain in occupation of the premises when the quarter's rent becomes due on 25 March, leave on 26 March but still be liable for the entire quarter's rent.
Issues with the Goldacre analysis
Goldacre has received much criticism amongst insolvency and property lawyers, who believe it has a number of failings. There are many technical explanations of why these lawyers believe it was wrong, but two of the more simple are:
- the judge applied the liquidation "salvage" principle, which some insolvency practitioners say should not apply at all in administrations. The liquidation salvage principle states (very summarily) that the officeholder has to pay for what he uses as if it was an expense of the liquidation. In an earlier leading administration case (in respect of a pre-Enterprise Act administration) the Court of Appeal (in Re Atlantic Computers) said an administrator may have to pay for what he uses as if it was an expense (in practice the administrator usually does – but the important distinction is the court still has a discretion in the latter case); and
- the judge incorrectly applied the salvage principle, in that the officeholder should only have to pay (as if it were an expense) for the value of what he uses, not "anything that falls due" whilst he uses the asset.
This latter failing is highlighted even further when considering other sums that may become due in addition to rent. The judge in Goldacre believed that even dilapidation claims that fell due during the course of the administration had to be paid as an expense and this does not appear right, taking into account the rescue culture inherent with administrations.
Even if the salvage principle is applicable in administrations, the judge in Goldacre did not apply it in the same way as it was applied in the cases involving liquidations (most recently summarised by the Supreme Court in Re Toshuku Finance Plc (In Liquidation). In those cases the officeholder paid for what he used. This is because, under the salvage principle, the obligation to treat liabilities associated with the property are triggered by the use of the land rather than obligations under the lease. So, in the example above, the administrator would only have to treat as an expense any liabilities associated with the day's occupation of the company – one day's worth of rent rather than the entire quarter. Many insolvency practitioners believe that this is a fairer and more rational analysis than that set out in Goldacre where the amount payable by the administrator solely depended on when in a quarter the company used the premises, rather than for how long.
Can administrators plan administrations to completely avoid having to treat rent as an expense, irrespective of beneficial use?
Applying the Goldacre principles – perhaps.
Although Goldacre did not specifically address what would happen in a situation where a company goes into administration between quarter days, many insolvency practitioners and lawyers have applied the analysis in that case to argue that where:
- the tenant in administration is in occupation of a property for the benefit of the administration; and
- that period of occupation does not include a date on which the rent (or other sums) becomes due then the administrator is not obliged to make any payments to the landlord as an expense of the administration and any liabilities under the lease (most commonly where an instalment of rent was unpaid before the administration began) fall to be treated as unsecured liabilities.
So, a tenant could fail to pay the rent on 25 March, go into administration on 26 March, remain in beneficial occupation of the premises until 23 June without the administrator having to pay any money to the landlord whatsoever.
In practice, after the decision in Goldacre, many administrators appear to have timed administrations so that they begin shortly after the quarter day, to side step (or benefit from) the Goldacre decision.
"...there is a strong argument that the true interpretation of the salvage principle should be applied... as this would achieve a fairer and more balanced result for administrators and landlords."
Issues with the Goldacre analysis:
For the same reasons set out above, there is a strong argument that the true interpretation of the salvage principle should be applied in these cases as this would achieve a fairer and more balanced result for administrators and landlords. However, some industry pundits have suggested that a wider application of this principle will lead to more pre-pack administrations as administrators will want to avoid having to make expense payments to landlords. For reasons outside the scope of this article, pre-pack administrations can often be unpopular with landlords due to their perceived lack of transparency.
Even if Goldacre is overturned, however, there would still be uncertainty for landlords. Pre-Goldacre case law has shown that the courts are not likely to direct the administrators to pay rent as an expense unless the landlord has moved quickly to apply to court for its permission to forfeit.
Is the rent always payable at the contractual rate?
Applying the Goldacre principle – yes.
In Goldacre the amount payable by the administrator in relation to the beneficial occupation was the rent due under the lease.
Applying (the proper view of) the salvage principle – perhaps.
In earlier liquidation salvage cases, the amount payable by the liquidator was also the contractual rate of rent. In the Court of Appeal decision mentioned above (Re Atlantic Computers) an administrator was directed to pay rent as an expense, but only to the value of the lesser rent he was receiving from the sub-tenants. However, there remains an argument that, because the occupation is based on beneficial use, it cannot always be correct that the amount that the liquidator/administrator has to pay is the contractual rate. For example, if the property was over rented then the administrator would be paying for more than he was using if he had to pay a sum for the beneficial use based on the contractual rent.
Where do landlords stand in relation to Goldacre?
Although, as a first instance decision, Goldacre is not binding it is often relied upon by administrators to argue that they do not have to treat any of the liabilities arising from a company's occupation of the premises as an expense of the administration. In reality, it has caused an unsatisfactory situation for both landlords and administrators (with the timing of the administration dictating who is faced with the unsatisfactory outcome).
A recent challenge to the Goldacre decision in the High Court (in which this firm acted for one of the landlords) was settled before the Court was asked to make a decision on the issue. Accordingly, it is a decision that remains – although with the recession continuing, it is likely that further administrations will follow which may lead to some much needed clarification by the courts.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
