Lees Solicitors - Landlords and the Insolvent Tenant - Mike Read

Commercial Property News

Landlords and the Insolvent Tenant - Mike Read


Landlords and the Insolvent Tenant - Mike Read

Recent case law has clarified the position with regard to the payment of rent by the administrators of an insolvent company which significantly strengthens a landlord's position in relation to tenants that fall into administration.

In the last twelve months we have seen many well-known retail companies including Woolworths and Threshers going into administration leaving the landlords of hundreds of high street premises without rent and without the means of securing payment.

When a tenant company becomes insolvent and has an administrator appointed rent and rent arrears, as such, simply fall into the category of being an unsecured liability and a landlord will get paid only to the extent that there are any funds available for distribution after preferential creditors have been paid and any floating charges satisfied. In practice landlords may, at best, receive a dividend in respect of outstanding rent arrears or quite possibly nothing at all and the position is exacerbated because, despite the tenant's insolvency, an enforced moratorium applies and a landlord cannot take steps to forfeit an insolvent tenant's lease if the company is in administration, without first obtaining the administrators consent or the permission of the court.

This means that in effect, a company in administration may occupy leasehold premises for a period of time rent free. However what has now been made clear by the courts is that landlords can derive some comfort and indeed financial relief if the circumstances are such that the rent due under the lease can be described as an "expense of the administration" in which case such rent must be paid from the assets of the insolvent company before any payment is made to preferential creditors.

So when will rent be classified as an "expense of the administration"? That question is answered by considering the nature of the liability itself, and if that liability i.e. the payment of rent, arises by the company in liquidation using the assets of a third party for the benefit of creditors, then such liability will rank as an expense.

So to take the example of Woolworths and Threshers, when the administrators were appointed they took the step of closing some branches of those stores immediately, some were closed within a couple of weeks and some were allowed to remain open and continued trading for much longer. In all those cases where the premises remained open for business, they continued to trade and to be "used" for the ultimate benefit of creditors and therefore the administrators were bound to pay the rent in full as an expense of the administration.

The recent case of Goldacre (Offices) Ltd v Nortel Networks UK Ltd (in administration) [2009] has reinforced the basic concept that where leasehold property continues to be used by administrators for the benefit of creditors then the entire rent payable under the lease must be paid as an expense of the administration. The court in that case further held on the facts that the rent payable could not be proportionately reduced simply because the administrators only occupied and used a small part of the leased premises. If any part of the premises, however small, continues to be used then the rent, in full, must be paid.

Landlords should not necessarily expect administrators to pay rent as and when it falls due as there may simply not be sufficient available funds for them to do so, but it does mean that in terms of establishing the priority of creditors, a landlord may take priority over even the preferential creditors if the property concerned has continued to be used by the administrators for the ultimate benefit of creditors generally which would certainly be the case if the administrators have continued to trade from the premises.

If you are a landlord faced with an insolvent tenant it is important that you understand your rights as against the administrator particularly as regards the payment of rent, and if you would like more information concerning this particular issue please contact the Business & Property Services Department of Lees Solicitors LLP.

Mike Read
Principal
Business & Property Services Department

 

This article provides a summary of a recent update in law. It is intended for general information purposes only and is not to be relied upon. It does not constitute legal advice and should not be treated under any circumstances as a substitute for legal advice. Lees Solicitors LLP does not accept any responsibility for any loss that may arise from reliance upon the information contained within this article. The copyright in this article is owned by Lees Solicitors LLP and permission must be sought before reproduction or publishing.


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