UK: How To Deal With A Tenant In Administration

Legal update for landlords
Last Updated: 24 July 2012
Article by David Marsden

This year there has been a spate of high profile retailers entering administration. In the first part of 2012 Blacks, Peacocks, Clintons, La Senza, Game and Past Times have all gone into administration. This is often seen as an indication of the state of the retail market, in particular the high street. Whilst this is no doubt true, administrations are often also used as a restructuring exercise.

The position of landlords faced with a tenant in administration has been complicated by recent caselaw. Some light has been shed on this by the very recent case of Lazari GP Limited & Lazari Real Estates Limited v Game Retail (UK) Limited, handed down on 11 May 2012, in which Charles Russell acted for the successful landlord.

Moratorium

A tenant usually starts the administration process by filing at court a Notice of Intention to appoint an administrator. As soon as this is done, the tenant is protected by a moratorium which prevents any action being taken by creditors.

In the context of a lease para 43 of Schedule B1 to the Insolvency Act prevents the landlord from distraining on rent or forfeiting against a tenant in administration. Forfeiture (i.e. terminating the lease by proceedings or peaceable re-entry) is therefore only available against a tenant in administration where the landlord either obtains consent from the administrator or permission from the court.

As soon as forfeiture becomes an issue, the landlord must also be very careful not to waive the right to forfeit by, for example, demanding or accepting rent.

Forfeiture

Guidance on how the court should deal with applications for permission to forfeit was given in re Atlantic Computer Systems Plc [1992] Ch 505 (CA). It is essentially a two fold test:

  • Purpose of Administration: permission should normally be given if forfeiture is unlikely to impede the achievement of the purpose of the administration.

The purpose of an administration is either to:

(a) rescue the company as a going concern;

(b) achieve a better result for the company's creditors as a whole than would be likely if the company were wound up (without first being in administration); or

(c) realise property in order to make a distribution to one or more secured or preferential creditors.

If there is no prejudice to the administration then the balancing exercise below does not apply. If however there can be shown to be some prejudice then the balancing exercise will be carried out.

  • Balancing Exercise: if there may be some prejudice to the administration by forfeiture then the court must balance the interests of the landlord and the interests of the other creditors of the company.

In conducting the balancing exercise, great importance is normally to be given to the proprietary interests of the landlord. It will normally be a sufficient ground for the grant of permission if significant loss would be caused to the landlord by a refusal.

Administrator's Strategy

When a tenant goes into administration the administrator will usually separate out the profitable stores in the portfolio from the non-profitable stores. A landlord should therefore immediately ask the administrator whether he is prepared to pay rent as an expense of the administration. In response:

  • Non-Profitable Stores: the administrator will write to the landlords of the nonprofitable stores and offer a surrender. In that situation a landlord will often agree in principle to a surrender until such time as they have found a new tenant and will then formalise the surrender. This at least saves on any rates liability.
  • Profitable Stores: the administrator will wish to continue to use these properties. It used to be that the administrator would offer to pay rent as an expense of the administration during their period of occupation only. This has been somewhat complicated by two recent cases of Goldacre and Luminar (below).

In practice, the administrator will often sell the assets of the company in administration to a newly incorporated company specifically incorporated for that purpose. The administrator will then grant a licence to occupy to that newly incorporated company and will seek consent from the landlord to assign to that new company.

At this stage landlords should be asking for a copy of the sales contract and ask the administrator for clarification of the purposes of the administration.

Consent to Assign

The terms on which a landlord can or cannot refuse consent to assign are set out in the lease for each property. Often, a landlord can reasonably withhold consent to an assignment to a newly incorporated company on the grounds of financial standing. A response by a landlord to any request to assign needs to be swift but also carefully considered as a landlord cannot add subsequent reasons later for their refusal to consent to assign. If the landlord gets it wrong the administrator can claim that the landlord is unreasonably withholding consent and insist on the assignment.

Payment of Rent

Goldacre (Offices) Limited v Nortel Networks UK Limited (in administration) [2010] Ch.45 was considered a "landlord friendly" case. It states that if an administrator is in the property on the quarter date he is liable for all rent on the quarter date for that entire quarter as an expense of administration. This is because almost all leases will state that rent is quarterly and payable in advance.

Administrators started to use Goldacre to say that if they were not in on the quarter date they were not liable to pay the rent. In Leisure (Norwich) II Limited v. Luminar Lava Ignite Limited [2012] EWHC 951 (Ch.) it was held that:-

  • where rents fell due prior to the start of the administration, those arrears are not payable as an expense of the administration but;
  • where rents fall during the administration and the administrator is using the property, the whole quarter's rent is due as an expense of the administration. This is of course very much against landlords and will no doubt either be distinguished or overturned in the Court of Appeal. One issue that remained undecided, however, was whether if an administrator chose not to pay rent for the first quarter, the landlord could still forfeit. Lazari v. Game decided that it could.

Lazari GP v Game (UK) Retail

This case is a good example of the above principles in practice, in the context of a modern administration.

Game went into administration on 26 March 2012, being the day after the quarter date. Lazari were Game's landlord at their flagship property on Oxford Street. PwC, the administrators of Game, stated that as a result of Goldacre and Luminar they were not prepared to pay rent for the March quarter because they were not in occupation on the March quarter date. They therefore sought to prevent the landlord from forfeiting whilst at the same time not paying rent from March to June. PwC also granted a licence to occupy to a newly incorporated company called Baker Acquisitions Limited without landlord's consent. The administrators claimed that they had entered into a Business Sale Agreement with Baker Acquisitions Limited selling Game's assets but that they were not prepared to disclose a copy for commercial reasons.

Lazari served a s146 notice on PwC detailing three breaches of lease:

  • non payment of rent (for which such a notice is not required in any event);
  • insolvency; and
  • breach of the alienation provisions.

The administrators refused consent to forfeit and so Lazari applied to court for immediate consent to forfeit. That application was heard on 11 May 2012.

It may be asked how a company no longer in occupation might suffer prejudice in allowing a forfeiture because the party really suffering from the forfeiture is the illegal occupier. This is often addressed by administrators by an element of deferred consideration in the business sale agreement, whereby the buyer of the insolvent business agrees to pay deferred consideration in the event of a successful assignment. In Lazari v. Game, however, and following the guidance in Atlantic Computers, the court held that there was no evidence of any prejudice to the administration in allowing the forfeiture and therefore it did not even need to consider the balancing exercise.

It thereby showed that forfeiture can take place even post Luminar, where the Administrator chooses not to pay rent. This is of course correct because, whether the rent is technically payable or not, the refusal to pay rent by the administrator is a prejudice that the landlord is suffering and cannot be ignored under the Atlantic Computers test.

Landlords do however have to act early and need to adopt tactics to ensure that the matter gets to court as quickly as possible.

Summary

Certainty in the law is a rare luxury but it does seem that the recent caselaw has complicated what used to be quite a straightforward area of law. Administrators used to have to "pay as you go" and pay rent as an expense for the time of their use. Luminar has not only stopped this but has also seen moratoriums used for a purpose they were not intended, in denying forfeiture for the benefit of third parties.

As the Court of Appeal stated in Atlantic Computers:

"An administrator is an officer of the court. He can be expected to make his decision speedily, so for as he can do so. He may be able at least to make an interim decision, such as agreeing to pay the current rents for the time being. The administrator should also make his decision responsibly. His power to give or withhold consent was not intended to be used as a bargaining counter in a negotiation in which the administration has regard only to the interests of the unsecured creditors."

The sooner the courts can distinguish Luminar therefore, and get back to the common sense position that previously prevailed whereby administrators pay for their use, the better for all concerned.

If your tenant has gone into administration and you need further guidance, please do not hesitate to contact the author.

"After the decision in Luminar, this case provides some comfort for landlords. It is only fair that where a tenant deliberately waits until after a quarter day before going into administration to avoid paying the rent, the landlord may still forfeit the lease." Counsel Jonathan Upton, Tanfield Chambers

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.

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