UK: Tenants In Administration

Last Updated: 7 August 2012
Article by David Marsden

Charles Russell have recently acted for landlords in the high profile administrations of Game and Blacks, in both cases managing to get not just the rent paid but also achieving forfeiture.

With further administrations likely, particularly immediately following each quarter date, this article sets out a landlord's choices when faced with a tenant in administration, focussing on the two issues that concern landlords the most:

  • Will my rent be paid?
  • Can I get the property back?

Moratorium

The administration process starts when the tenant files 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. This means that a landlord cannot distrain on rent or forfeit against a tenant in administration unless the landlord either gets consent to do so from the administrator or permission from the court.

Administrator's strategy

An administration in the sense of a property portfolio is usually a restructuring exercise. The administrator will separate out the profitable stores in the portfolio from the nonprofitable stores. The first thing a landlord should do therefore is ask the administrator whether he is prepared to pay rent as an expense of the administration. In response the administrator will usually offer a surrender of the non-profitable stores.

The administrator will however wish to continue to use the profitable stores. In that situation 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 (see below).

Assignment to licensee

The administrator will often sell the assets of the company in administration to a newly incorporated company. The administrator will then grant a licence to occupy to that newly incorporated company (usually in breach of lease) and will seek retrospective consent from the landlord to assign to that newly incorporated company.

The terms on which a landlord can or cannot refuse consent to assign are set out in the lease. Often, a landlord can reasonably withhold consent to an assignment to a newly incorporated company on the grounds of financial standing.

A response 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.

Will my rent be paid?

Goldacre (Offices) Limited v Nortel Networks UK Limited (in administration) [2010] Ch.45 was considered a "landlord friendly" case. It states essentially that if an administrator is in the property on the quarter date he is liable for all rent 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 until the next quarter date, which is what happened in the Game administration. Game went into administration on 26 March 2012, the day after the quarter date and the administrators refused to pay rent until the next quarter, almost three months later.

To make matters worse for landlords, Leisure (Norwich) II Limited v. Luminar Lava Ignite Limited [2012] EWHC 951 (Ch.) 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 there is talk of a class action being brought by institutional landlords to challenge this. This is therefore an area of law that is likely to develop rapidly over the next year or so.

The current position though is that if the administrator is using the property on a quarter date then the rent for that following quarter will almost always be paid as an expense of the administration. The main disputes arise, however, in relation to the rent from the date of the administration until the next quarter date.

Can I Forfeit?

Forfeiture can only be obtained with the administrator's consent or permission from the court. 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.

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.

Lazari GP v Game (UK) Retail

Game went into administration on 26 March 2012, 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.

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.

This case thereby showed that forfeiture can take place even post Luminar, where the Administrator chooses not to pay rent for the first part of administration.

Summary

Administrators used to 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 illegal third party occupiers.

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

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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