Many landlords use an old remedy to recover unpaid rent from sub-tenants where tenants have gone into default. This is set out in Section 6 of the Law of Distress Amendment Act 1908. The remedy pre-dates the rescue culture intended by administration by nearly a century. Given the increasing number of tenant companies in administration, landlords are asking whether the old Section 6 right survives the moratorium that administration gives to the administrator whilst he tries to restructure or sell the company or its business.
This is an area where there is some legal debate at present. We are of the opinion that landlords can use this remedy but it is untested by case law.
What is the effect of Section 6 of the 1908 Act? It creates a right for a landlord to receive rent from a sub-tenant when the tenant is in arrears by service of a notice. Technically, it deems the sub-tenant to be the immediate tenant of the landlord.
What does the moratorium protect? The moratorium prevents steps being taken to enforce security over the property of the company in administration (except with the consent of the administrator or an order of the court). It also prevents the start or continuation of any legal process against the company in administration.
Can Section 6 be used when the company is in administration? The answer to this question hinges on whether Section 6 operates as a method of ‘enforcing security over the company’s property’ or constitutes the initiation of legal process against the company. There does not seem to be any reason for it to fall into the category of being the start of a legal process.
There are some interesting technical legal arguments around the issue of whether this constitutes enforcing security but no case law. Our view is that it probably does not constitute enforcing security over a company’s property and any landlord would be well advised to try the remedy where the tenant is in arrears and the sub-tenant is solvent, whether or not the tenant is in administration.
It will be interesting to see whether in this market there is an administrator who finally challenges a landlord who takes such a step.
Can section 6 be used against unlawful occupiers? Sadly for landlords we think not as Section 6 cannot be used where the underlease was granted in breach of the terms of the headlease. A retrospective consent to a short underlease (rather than a tolerated breach by the grant of a licence to occupy) could be considered coupled with notice of the intention to use Section 6. In the messy world of Administration, where pre packs mean third parties are in possession with the tacit consent of the administrator before you know it, this could help the landlord negotiate for payment of rent as an expense of the administration whilst the building is being occupied by Newco for the purposes of completing the administration.
