UK: Must Administrators Pay Rent?

Last Updated: 24 March 2010
Article by Christopher Harlowe and Merley Okine

A liquidator's obligation to pay rent for property occupied during the liquidation as an expense has been long-established, and the operation of Rule 4.218 of the Insolvency Rules is clear. Until recently however, the position in relation to administrations was less so. The High Court decision of HHJ Purle in the case of Goldacre (Offices) Limited v Nortel Networks Limited (in administration) [2009] EWHC 3389 (Ch) has helpfully clarified the position and it is now clear that administrators who continue to occupy the company's premises have to pay the rent passing under the lease as an expense of the administration.

Prior to its administration, Nortel occupied premises under two long leases. Following their appointment, the administrators continued to occupy part of one of the properties. The landlord served notices under section 6 of the Law of Distress Amendment Act 1908 on the sub-tenants of the unoccupied parts, requiring them to pay their rents directly to the landlord. The landlord then applied to Court for an order clarifying whether the administrators had an obligation to pay rent as a result of their continuing occupation, and if so, the extent of that obligation.

HHJ Purle compared Rule 4.218 with its administration equivalent, Rule 2.67(1). As a starting point, he could see no logical reason why an entirely different approach should be taken in relation to administrations, and expressed the view that since administrators now have the power to make distributions to unsecured creditors (with the Court's permission), "administrations may come to resemble liquidations, and it would be surprising were the [expenses] principle to apply to one and not the other".

HHJ Purle compared the phrase "... expenses properly incurred by the administrator in performing his functions in the administration of the company" in Rule 2.67(1)(a) with "... any necessary disbursements [incurred] by the administrator in the course of the administration" in Rule 2.67(1)(f). He considered that rent for occupation during the period of the administration fell within Rule 2.67(1)(a), and that imposed an obligation on the administrators to pay that rent, receipts permitting. He found that if he was wrong in concluding that such rent fell within the wording of Rule 2.67(1)(a), it would alternatively fall within the wording of Rule 2.67(1)(f); either way, it was an expense which the administrators had to pay as a consequence of their occupation, either as a "proper expense" or as a "necessary disbursement". In any case, he reasoned that the wording in Rule 2.67(1)(a) should be construed more broadly, or "necessary" given an extended meaning, or both.

Having reached the preliminary view that liquidations and administrations were to be approached in the same way, HHJ Purle held that the requirement of "necessity" in Rule 2.67 (1) (a) did not require any threat of enforcement by a landlord or creditor; rather, any payment "which ought to be made in fairness and justice" was "necessary" for these purposes. If the payment fell within the wording of Rule 2.67(1), the administrator had an obligation to make the payment (receipts permitting), not merely a discretion to pay it.

HHJ Purle held that as the obligation under the lease in the present case was to pay rent quarterly in advance, the administrators inherit that same obligation: they cannot argue, for example, that as they only intend to occupy the premises for one month of the quarter, they need only pay one third of the rent payable in advance.

HHJ Purle also considered the Court of Appeal's decision in Sunbury Properties Limited v Innovate Logistics Limited, where it was assumed that the administrators had no obligation to pay rent, where the administrators were allowed to remain in occupation of the premises in return for paying the sums passing under a licence with a third party purchaser of the company's assets, as this facilitated the purposes of the administration. HHJ Purle held that to the extent that that case suggested that the administrators had a discretion as to whether or not to pay rent, it was wrong: if the case was authority for saying that the Court had a discretion to order the administrators to pay rent to the landlord, HHJ Purle found that the administrators here should pay the rent as required by the leases.

Helpfully, HHJ Purle confirmed that, despite this finding, the landlord has no right to immediate payment: presumably the administrators can wait to establish what other claims are made which fall into the same category before making a payment to the landlord.

Comment

Although unwelcome, HHJ Purle's decision is clear. Administrators who continue to occupy the company's premises have to pay the rent passing under the lease as an expense of the administration. A number of points arise from this which need clarification. For example, in the Nortel case, the landlord had already "redirected" the rents payable by sub-tenants to itself. If the landlord had not taken that action, is the administrator liable for the full rent under the lease, with the right to receive the sub-rents? If so, presumably if the sub-tenants failed to pay, the administrator remains liable to the landlord.

A number of practical considerations arise from the judgment:

  • The case suggests that administrators could justifiably decline to pay rent immediately in order to ascertain whether any other claims falling into the same "category" arise. How long should the administrators allow this situation to continue?
  • The decision at least helpfully confirms that ransom payments can be made to parties whose continued support is necessary for the administration even if that creditor has not threatened any enforcement action, with such payments being treated as expenses of the administration. This appears to be a general authority, not limited to disputes with landlords, but covering all creditors.
  • Administrators should ensure that they are not in occupation at the end of the lease, as at that point, dilapidations claims could arise and would probably constitute an expense – and these could be very considerable.
  • Unfortunately, the judgment does not consider the parameters of the term "occupation" in any detail. Therefore, administrators should, in the event that they do not require use of the premises, ensure that they do not inadvertently treat the premises in a way that might be construed as "occupation" of the premises. An example of this might be using the premises to store company assets pending potential sale of those assets.
  • The decision appears to leave open the possibility of arguing that practically, part of the property could be returned to the landlord and re-let in return for a proportionate reduction of the full rent payable under the lease. In the Nortel case, the landlord successfully argued that for data security reasons, they could not occupy the parts of the building which the administrators did not require, but in other cases, the facts may lead to a different conclusion.
  • Administrators should ensure that prior to appointment they carry out due diligence on all the company's leased premises and review the terms of all leases. It is especially important to consider the rent payment terms and due dates as this might have an impact strategically on the financial considerations of the administration. For example, in circumstances where the premises are only required for a relatively short period during an administration, administrators might reconsider the timing of the appointment if a review of the lease shows that a quarterly rental payment is due to be made shortly after appointment.
  • The decision highlights the fact that service of a notice under section 6 Law of Distress Amendment Act 1908 by a landlord, having the effect of transferring the company's right to receive rent from a subtenant to the landlord, as an effective means of recovery for a company in administration.

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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