Insolvency administration - an opportunity for landlords?

Landlords may feel that current legislation unduly favours administrators appointed over insolvent corporate tenants. We look at a recent case that may provide some welcome relief for landlords.

The appointment of an administrator gives rise to an immediate moratorium in respect of legal process in order to facilitate the potential for turnaround or rescue. In the context of a commercial lease, the moratorium extends to forfeiture and distress as well as conventional claims and winding up proceedings - effectively tying the hands of the landlord for the duration of the administration process. This will be for 12 months in the first instance but may be extended. The moratorium may only be lifted with the consent of the administrator or the court and, in the case of landlord enforcement, such consent is unlikely if the premises are needed to facilitate a sale of the tenant's business as a going concern or to maximise realisations for creditors. 

However, the recent case of Goldacre (Offices) Limited-v-Nortel Networks UK Limited (in administration (High Court 7/12/09)) provides some welcome relief for landlords.

Here, the payment of rent and other liabilities due under Nortel's leases were held to fall within the statutory list of 'expenses of an administration' set out in the Insolvency Act and Rules 1986 as amended by the Enterprise Act 2002. In consequence, the court had no discretion about whether the administrators were obliged to pay the rent instalments. Rather, these continued to be payable in full on the rent payment days for so long as the administrators used the whole or any part of the premises, however limited, for the purposes of the administration. Given the wide concept of "use" established under the existing body of insolvency case-law, the administrators are likely to remain liable under this authority even if they have allowed a purchaser of the tenant's business to use the premises under a licence to occupy (although the judge in Goldacre did not have to rule on this point).  

Goldacre is of particular benefit to landlords because the expenses of an administration are paid from realisations before settling the administrators' own remuneration and before the claims of any other creditors. Furthermore, following the logic of the decision:

• An administrator will remain liable to pay as an expense any other sums due under the lease whilst the premises are used for the purposes of the administration. This might include dilapidations claims, so landlords may wish to take the opportunity to carry out mid-term or (if relevant) terminal dilapidations surveys during the period of administration, particularly if they believe that there are sufficient funds in the administration to settle such sums.
• If administrators vacate the premises during a rental period, they are not entitled to a rent rebate for any rent paid in advance for the period thereafter.
• Administrators cannot benefit from any informal concession previously agreed between the landlord and tenant to allow monthly rather than quarterly rent payments. Administrators will be obliged to pay rent quarterly in advance in accordance with the lease unless the landlord agrees otherwise. Of course, if the administrator has other expenses to meet with equal priority he may need to postpone payment until he has clarity on the extent of his realisations and other commitments.
• Administrators who seek to vacate leasehold premises will still be liable to pay lease sums as expenses of the administration until they have cleared out all the tenant's chattels unless these are deemed to have been abandoned.

The judge in Goldacre did not have to rule on all the points set out above, but they potentially provide useful arguments for landlords. 

However, notwithstanding the decision in and potential implications of Goldacre:

• Even if lease sums rank as expenses of the administration, landlords cannot necessarily expect payment as they fall due. A court order may be needed and the court's discretion may only be exercised in favour of the landlord if and when there are sufficient assets in the administration to settle the payments. An administrator will not himself have any personal liability to pay these expenses.
• Goldacre has been met with consternation by insolvency practitioners and many commentators, who believe it places landlords in a preferential position unintended by Parliament and potentially undermines the administration 'rescue culture' promoted by the Enterprise Act 2002. A similar 'expenses of administration' case involving the administrators' liability to pay business rates led to rapid legislative changes to ease the burden on administrators (Exeter City Council v Trident Fashions plc - High Court 2007). 

Whilst an amendment to the insolvency legislation might be desirable in favour of the rescue culture, it remains to be seen when Parliament could deal with the issue, particularly given the forthcoming General Election. In the meantime, without any such legislative changes or an overriding decision from a higher court, Goldacre should strengthen a landlord's position when negotiating with its tenant's administrators. 

For further information, please contact Gillian Smith, who is a partner in Michelmores' Restructuring and Insolvency team, at gillian.smith@michelmores.com; or Joe Gribble, a consultant in the Commercial Property team at joe.gribble@michelmores.com.