This post was also written by Clare Whitaker.
A decision by the High Court in December has strengthened the position of landlords who sometimes do not get paid during the administration even where the administrator is running the business from the property.
Certain categories of expense which may be incurred by the company after it has gone into administration, and which an administrator has to pay are known as “expenses of the administration” and the assets of the company in administration must be applied towards payment of these expenses ahead of any payment to creditors under floating charges or to unsecured creditors.
The categories of expense include “expenses properly incurred by the administrator in performing the functions in the administration” and “any necessary disbursements by the administrator in the course of the administration”. These two categories of expense in fact rank ahead of the administrator’s own remuneration.
In December, the Court decided that, if a leasehold property is occupied by a company in administration for the benefit of creditors, the administrator must pay the rent under the lease as an administration expense because it falls into one of the two categories mentioned above. The rent is payable whether or not the landlord demands it.
Before this case, there had been no decision about whether rent could be claimed by a landlord as an administration expense for the period following the administrator’s appointment. The moratorium which arises on administration prevents landlords (and other creditors) taking action against a company in administration. This means that landlords are unable to take forfeiture proceedings to recover rent without the consent of the administrators or the permission of the Court.
In practice, many administrators were paying rent on the premises the company occupied but had a discretion about what and when to pay and since landlords were considered to rank as unsecured creditors, prospects of recovering arrears were poor even for the rent that accrued during the administration only.
In the case under discussion, the company in administration was only in occupation of a small part of the premises and argued that the liability for rent should be assessed by reference to the floor space which they were actually occupying. On the particular facts, the Court felt that the administrator should pay the full rent following evidence from the landlord’s surveyor that, as long as the company remained in occupation, there was no realistic prospect of maximising the return from the premises. Clearly, this might not always be the case.
A factor which is not in the landlord’s favour is whether the assets of the company are sufficient to enable the administrator to pay the rent as it arises. If the sufficiency of the assets to meet the rent, together with other priority claims, is in doubt, the administrator will be justified in deferring payment until he leaves office. As such, landlords do not have a right to immediate payment, but they are entitled to know that the accruing rent is being treated as an administration expense with appropriate priority for as long as the company is making use of the premises and that, subject to the assets being enough, it will be paid at the end of the administration. This is not ideal but there is nothing else that can be done.
Where, as in the case decided in December, the assets are acknowledged to be sufficient to meet the rent as it arises, the administrator had no justification for not paying the rent quarterly in advance in accordance with the lease for as long as the company continued to occupy any part of the premises for the purposes of the administration.
Sadly landlords facing pre-packs will not gain from this as the process involves the new company taking occupation immediately the administration and sale have been set up. The landlord is often simply left trying to negotiate the terms of the new company’s occupation. In that situation it can be helpful to agree a surrender with the administrator and to have a direct relationship with the new company and the ability to recover something for the occupation of the property direct without involving the administrator. If that is not the case then under some pre-pack sale agreements the new company is required to pay the administrator rent and landlords so sometimes claim that successfully from the administrators.
Action Points for Landlords:
1. When you know the tenant is in administration but the premises are being traded from contact the administrator to persuade him to pay rent as an expense.
2. Where there is an asset sale of the business by the administrator to a new company who is trading from the premises put the administrator under pressure to cover the rent until a formal assignment is completed. Our experience is that sometimes this can be successful.