UK: Goldacre (Offices) Limited - When Post Administration Rent Is Payable As An Expense

Facts Of This Case

Prior to administration, Nortel had entered into two long leases with the landlord, Goldacre, in respect of two properties. Following administration, Nortel continued to use part of the premises in both of the demises for the benefit of the administration. All rents were paid up-to-date, albeit late so far as the September quarter rent was concerned. This case concerned the payment of future rent and addressed three questions:

• Whether future rent was payable as an administration expense?
• If so, whether the rent so payable should be restricted by reference to the company's period of administration occupation, or whether it extended to the full amount of quarterly rental payments falling due during the administration occupation?
• Whether any obligation to pay rent as an administration expense should be limited by reference to the proportion of the premises actually occupied or used by Nortel, or whether it extended to the whole of the demise.

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Full Article

In a landmark reversal of current opinion, HHJ Purle QC decided in the recent case of Goldacre (Offices) Ltd v Nortel Networks UK Ltd [2009] EXHC 3389 (Ch) that rent falling due while a company in administration retains possession or use of any part of leasehold premises for the purposes of the administration will now normally be payable as an administration expense

Background

Liabilities incurred by a company before administration are generally treated as unsecured debts of the company.  They do not normally enjoy priority as an administration expense unless the administrator adopts the contract.  Prior to this case, that was the starting position for leasehold liabilities, which derive from contracts entered into by the company before the administration.  Often administrators and landlords would negotiate terms, and landlords would sometimes seek to improve their position by seeking consent to forfeit the lease of premises occupied by a company in administration (which requires the administrator's or the court's consent because of the administration moratorium).  If the landlord was refused consent to forfeit, it would sometimes be granted the right to a payment of rent referable to the period of the administration occupation.  In other examples, the landlord's payment might be based on what was considered to be equitable in the circumstances.

Prior to 2003, the administration expenses regime was regarded as altogether different from the liquidation expenses regime.  The general view was that the old administration expenses regime involved some discretion, taking account of liabilities incurred for the benefit of the administration, and balancing the interests of the creditors as a whole.  However, there was a big change in the administration regime in 2003 when the Enterprise Act 2002 new style administration was introduced.  The new administration expenses regime contained in paragraph 99 of Schedule B1 of the Insolvency Act 1986 and Rule 2.67 of the Insolvency Rules 1986 introduced wording very similar to that of the existing liquidation expenses regime, contained in Rule 4.218.  Even so, many practitioners continued to interpret administration expenses principles as distinct from liquidation expenses principles on the basis that the purpose of administration (i.e. company rescue) is different from that of liquidation.

Following this case, it appears that the distinction between the two expenses regimes might be becoming more blurred.

Facts Of This Case

Prior to administration, Nortel had entered into two long leases with the landlord, Goldacre, in respect of two properties. Following administration, Nortel continued to use part of the premises in both of the demises for the benefit of the administration. All rents were paid up-to-date, albeit late so far as the September quarter rent was concerned.  This case concerned the payment of future rent and addressed three questions:

Whether future rent was payable as an administration expense?

If so, whether the rent so payable should be restricted by reference to the company's period of administration occupation, or whether it extended to the full amount of quarterly rental payments falling due during the administration occupation?

Whether any obligation to pay rent as an administration expense should be limited by reference to the proportion of the premises actually occupied or used by Nortel, or whether it extended to the whole of the demise.

The Decision

Purle HHJ agreed with the landlord's submissions that this case should be considered exclusively by reference to the Insolvency Rules 1986 (the "Rules") and that if it could be argued that the rental liabilities fell within the Rules, they would be payable as a matter of mandatory obligation and not as a matter of discretion, either on the part of the administrators or on the part of the court. 

The Judge also relied on Lord Hoffman's judgment in the House of Lords decision in Re Toshoku Finance UK PLC [2002] 1 WLR 671, which related to a company in liquidation, and, in particular, the application in that case of the Lundy Granite principle (or salvage principle as it is otherwise known). Under that principle, it was held that liquidators should pay rent as a liquidation expense where the company in liquidation makes use of or retains, for the benefit of the liquidation, possession of leasehold premises.   It followed that in a liquidation, rent, where the Lundy Granite principle applies, will ordinarily fall within Rule 4.218(a) as an "expense properly chargeable or incurred by the official receiver or the liquidator in preserving, realising or getting in any of the assets of the company".

The equivalent rule, so far as administration is concerned, is Rule 2.67(1) and the two relevant subparagraphs are: 

• Subparagraph (a) that deals with "expenses properly incurred by the administrator in performing his functions in the administration of the company"; and
• Subparagraph (f) that deals with "any necessary disbursements by the administrator in the course of the administration (including any expenses incurred by members of the creditors' committee or their representatives and allowed for by the administrator under Rule 2.63, but not including any payment of corporation tax in circumstances referred to in sub-paragraph [2.67(j)])..."

Purle HHJ favoured the view that the rental liabilities to which the Lundy Granite principle applied would fall within the administration expense category in Rule 2.67(1)(a) as 'expenses properly incurred by the administrators'.  However, the case of Exeter v Bairstow suggested otherwise.  This did not matter because, Purle HHJ found that if the rental payments did not fall under Rule 2.67(1)(a), then they would be captured by Rule 2.67(1)(f) as a 'necessary disbursement', by the application of the Lundy Granite principle.  In construing what is 'necessary' in this context, Purle HHJ agreed with remarks of Briggs J in Lehman Brothers International (Europe) [2009] EWHC 2545 that necessity extends to a payment that ought to be made in fairness and justice and was not confined to a situation in which there had been a specific threat of, in this context, forfeiture proceedings.  Purle HHJ was therefore of the view that the word "necessary" in Rule 2.67(a)(f) is plainly apt to extend to a case where the Lundy Granite principle applies.

Having decided that rent for premises occupied or used by a company in administration was payable as an administration expense, the Judge then turned to the question of the amount of the expenses claim. He considered, following the case of Re Levi & Co. Ltd [1919] 1 Ch 416 as applied to administrations, that an administrator electing to hold leasehold premises could do so only on the terms and conditions contained in the lease. As such, any liability incurred while the lease is being enjoyed or retained by the company in administration would be payable in full as an administration expense.

The Judge also referred to Sunberry Properties Ltd v Innovate Logistics Ltd [2009] 1 BCLC 145, because it was argued that the case required him to exercise discretion in considering how much it would be fair for the administrators to pay in respect of rental liabilities. If he had been required to undertake that exercise, Purle HHJ explained that he would have concluded that it was fair for the administrators to pay the entire rent for the forthcoming quarter.  However, the Judge considered that he was not bound to follow the judgment and exercise such a discretion because that part of the Court of Appeal's judgment in Sunberry was based on a concession and he was not bound by it.

As a final point, Purle HHJ explained that if the sufficiency of the realisable assets was in doubt, the landlord may have to wait and see to what extent the assets will be enough to satisfy its claim, as there may be other claims also having priority as an administration expense. There is in that sense, no immediate right to payment and, had this been relevant in this instance, then the question as to whether rental liabilities fall within 2.67(a) or 2.67(f) of the Rules would have had to have been determined. 

Comment

Following this case, it is now clear that where an administrator retains possession or use of leasehold premises for the benefit of the administration, rental payments falling due during the administration occupation will be an expense of the administration.

The judgement does, however, raise further concerns and in some respects uncertainty in relation to a number of issues, most notably the following:    

1. What order of priority should be attributed to rental liabilities within Rule 2.67 itself?  This would be relevant if there are insufficient assets to pay all the administration expenses in full.  It is possible that some administrations are now in this situation as a result of this decision because administrators had not previously anticipated having to pay rental liabilities in full.
2. If rental liabilities only become payable as an administration expense on the date they are due, can administrators benefit from this by starting the administration just after a quarter date and simply vacating the premises just before the next quarterly rent payment is due?   
3. The decision leaves open the question of what, if anything, landlords are entitled to where arrears of rent have accrued prior to the administration and the company continues to occupy the premises for the benefit of the administration, but vacates before the next rent payment date.
4. Is it just and equitable to allow all liabilities under an adopted lease (especially dilapidation liabilities that are incurred prior to administration) to be granted administration expense priority?
5. Where administrators allow buyers of the assets or business of the company to occupy leasehold premises as licensee, is it now open to a landlord to claim rent as an expense of the administration for each quarter? Administrators will need to carefully consider firstly the termination dates of such licences and secondly ensure that the licence fees are collected on time and upfront, on a quarterly basis, if that is what the lease provides.
6. Often, landlords will look to previous tenants for payment, especially where the outcome of the administration may not be known - indeed as they have only six months to make those claims, landlords may have no choice but to do so. Thought will, therefore, need to be given to whether such claims might also rank as administration expenses? 

What is clear from this case is that administrators should consider, where possible, what premises are required for the administration before taking appointment and settle a strategy in advance. Banks looking to make appointments will, therefore, need greater planning advice from their insolvency practitioners and lawyers. In some instances this ruling may have the effect of making administration itself a less attractive option and alternatives, such as a CVA, may be considered as a more suitable way forward.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

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The original publication date for this article was 25/01/2010.