Jan 2010 - Commercial Tenants in Administration

FARLEYS' commercial property team are giving their commercial landlord clients notice of a recent case decided in the High Court in December 2009.

It was held that if a tenant goes into administration and the administrator causes the company to use the leasehold property for the benefit of creditors, the administrator must automatically pay the rent that falls due under the lease as an expense of the administration, whether or not the landlord seeks payment.

In Goldacre (Offices) Limited v Nortel Networks UK Limited (in administration) [2009] EWHC 3389 (Ch) ('Goldacre') the administrators of Nortel Networks UK Limited ('Nortel') had used part of the property since the date of the administration for the more efficient conduct of the administration.

Goldacre (Offices) Limited applied to the High Court for an order directing that the administrators were to pay rent under the lease as an expense of Nortel's administration.

So what are administration expenses?

Where a company in administration incurs liabilities to third parties, the Insolvency Rules 1986 determine that some of these liabilities should be paid by the administrator out of the assets of the insolvent company before preferential creditors, floating charge holders and unsecured creditors are paid. Such liabilities are called administration expenses and will typically be paid in full. This contrasts with the position of unsecured creditors who usually receive only a minimal amount by way of settlement of their claim.

This case puts landlords of premises occupied by tenants in administration in a stronger position in terms of recovery of rent where the administrators occupy the property following their appointment.

Landlords previously had three options when a tenant went into administration:

1. ask for the permission of the administrator or the court to enforce one of it's remedies (e.g. forfeiture).
   
   
2. consider if there is a third party who may be liable to pay the rent.
   
   
3. persuade the administrator to pay the rent during the period of the administration as an administration expense.

Options 1 and 2 still apply and this case has now made option 3 easier to argue.

However, landlords should bear in mind the following:

• arrears of rent accruing prior to the date of administration are still likely to rank as an unsecured claim in the administration.
  
  
• the administrators will only pay rent as an administration expense for the period they are actually using the property.
  
  
• the administrator is to pay the full rent that falls due under the lease and cannot apportion the rent if the company uses only part of the premises.
  
  
• companies in administration can still occupy the premises for a time without paying rent - the case determines the priority of payment of rent and does not oblige the administrator to pay the rent immediately upon it falling due if the administrator does not have sufficient funds to do so.

It is likely that Goldacre will apply to a scenario where the company in administration grants to a purchaser of its business and assets a licence to occupy the premises.

Contact Farleys' commercial property team now on 0845 050 1958 if you require advice on the remedies which may be available to you should a tenant enter into a formal insolvency process.

Alternatively if you think you may be insolvent or are likely to become insolvent and need advice please contact our corporate insolvency team also on 0845 050 1958, or you can e-mail us.