Many commercial landlords will currently be dealing with issues arising out of their tenants' financial difficulties, in particular the impact of insolvency proceedings. A recent Court of Appeal case is a useful reminder of the approach the Courts will take when a landlord seeks to have the statutory moratorium lifted in order to enforce its proprietary rights against a tenant in administration.

Since the relevant sections of the Enterprise Act 2002 came into force on 15 September 2003, the appointment of administrators to a company has become relatively straightforward and inexpensive for the directors of the company or the holder of a floating charge over a company’s assets. The appointor need only file a set of documents with the appropriate Court to effect the appointment. The Insolvency Act 1986 provides that, when a company enters administration (or indeed when the directors of a company or a floating charge holder lodge a notice indicating that an appointment is anticipated once the necessary consents are obtained) there is a moratorium which prohibits action being taken against the company and its assets. The moratorium provides that, unless either the company's administrators consent or the Court gives leave, legal proceedings may not be commenced or continued, secured creditors may not enforce their security, owners cannot repossess goods which are subject to hire purchase or similar agreements and landlords may not enforce their right to forfeit. The moratorium is intended to give the administrators some breathing space and to assist in the achievement of the purpose of the administration.

Administrators must perform their functions in respect of a company to which they are appointed with one of three objectives. The objectives are hierarchical and so the administrator may only perform his functions with the second objective if the first objective is not reasonably practicable, and he may only perform his functions with the third objective if the first and second are not reasonably practicable. The objectives are, in order:

  1. rescuing the company as a going concern;
  2. achieving a better result for the company's creditors as a whole than would be likely if the company were wound up; and
  3. realising property in order to make a distribution to one or more secured or preferential creditors.

In seeking to achieve which ever statutory purpose is appropriate administrators must have the best interests of the creditors as a whole firmly in mind.

Landlords faced with a tenant in administration usually have two distinct types of claim: firstly, those with a monetary value, such as unpaid rent and all other financial claims arising under the lease, and secondly, proprietary rights to protect and/or claim back possession of their property. The administration moratorium prevents landlords exercising their rights or pursuing their claims. This can be frustrating for landlords, particularly when the tenant grants a licence to occupy the premises without the landlord's consent and the landlord cannot take action on this breach without first seeking leave of the Court (assuming, as will usually be the case, the administrators refuse consent).

Cases such as Re Atlantic Computer Systems plc [1992] Ch 505 and Metro Nominees (Wandsworth) (No.1) & Ors v K Rayment & Ors [2008] B.C.C. 40 demonstrate that the Courts will have a degree of sympathy for landlords and will afford significant weight to the landlords’ proprietary rights when deciding whether to allow landlords to commence proceedings against a tenant.

The recent case of Innovate Logistics Limited (In Administration) v Sunberry Properties Limited [2008] EWCA Civ 1321 involved a landlord, Sunberry Properties Limited (Sunberry) which wished to commence proceedings for termination of a licence to occupy granted by Innovate Logistics Limited (in administration) (Innovate), acting through its administrators. Both the granting of the licence and Innovate’s parting with possession of the premises constituted a breach of Innovate’s lease with Sunberry. The administrators refused consent for the action to be commenced on the basis that the continued occupation of the premises by the licensee was necessary in order for the purposes of the administration to be achieved.

The Facts

Sunberry leased premises to Innovate for a term of 30 years from 1998. The annual rent at the time of the dispute was £1,225,530. Innovate’s business was the storage and distribution of frozen foods. The lease was in broadly standard commercial terms and included the right of Sunberry to recover possession in the event of a breach of covenant.

Innovate went into administration on 30 June 2008. The administrators granted a temporary occupation licence to the purchaser of Innovate’s business. The purchaser did not purchase Innovate's interest in the lease and did not wish to lease the premises long term. Sunberry objected to the licence and sought an order for its immediate termination. The order was granted but Innovate was given leave to appeal. The appeal took place in November 2008.

The licence granted by Innovate was part of a “prepack” sale agreement. A prepack sale involves the sale of a company's business as a going concern at an early stage of an administration (usually on day one). The purpose of the administration of Innovate was in part achieved by the conclusion of the prepack sale. However, the continued collection of debts due to Innovate also fell within the statutory purpose of the administration as this would significantly increase the pot of money available for distribution to Innovate’s creditors. The purchaser was assisting in the collection of those debts, which had a value in excess of £8 million, and occupation of the premises for the period of the licence was required to enable the purchaser to do so.
During the period of the licence the buyer continued to pay rent, although on a month-by-month basis rather than quarterly in advance as provided for in the lease, so Sunberry's position was not significantly prejudiced. Sunberry did not have a new tenant lined up and did not seek leave to forfeit the lease. In fact, Sunberry admitted that its aim in bringing the action against Innovate was to improve its bargaining position with the purchaser in the hope that the purchaser could be persuaded to enter into an assignment.

The Decision

In any situation where a landlord seeks leave to bring proceedings against a tenant in administration, the burden will fall to the landlord to prove to the Court that it would be inequitable not to give leave. In reaching a decision, the Court, following the Atlantic Computers case, is required to “conduct a balancing exercise of the [landlord and tenants'] legitimate interests". If the granting of leave is likely to significantly impede the purpose of the administration it is less likely that leave will be granted.

Much of the decision hinged on the meaning of “the purpose of the administration”. The trial judge had concluded that the purpose had been achieved at the time of the sale of the business as a going concern. Unfortunately, his attention had not been drawn to certain relevant evidence, so he did not take account of the fact that the purpose of the administration would be achieved by the continued collection of book debts. As the rent was being paid to the landlord and the book debts continued to be collected, the Court of Appeal found that the balancing exercise favoured the interests of Innovate’s creditors, and leave for Sunberry to bring proceedings to have the licence terminated was refused.

Conclusion

Given the specific facts of this case, the decision is not surprising. Sunberry were put in no worse a position by the granting of the licence to occupy and, in fact, rent was paid by the purchaser during the licence period which Sunberry would otherwise have had to claim from Innovate as an unsecured creditor. Innovate’s creditors, on the other hand, were likely to be put in a better position if the licence was allowed to continue.

Notwithstanding this decision, landlords should bear in mind that when a tenant enters administration and continues to occupy the premises or grants a licence to occupy to a third party, the Court will wish to protect the landlord’s proprietary rights where possible and may allow the moratorium to be lifted in order to provide the landlord the opportunity to exercise those rights. Administrators, as officers of the Court, are aware that they should not abuse the moratorium and, in appropriate circumstances, should give consent to action being taken by landlords. Failure to do so will result in the risk of an adverse costs order against the administrators.

Generally if rent is being offered, whether by the tenant or a licensee, the landlord will be well advised not to make a hasty challenge to the moratorium. If no rent is being offered any application to Court may well find favour. Before taking any steps, however, the landlord should gather as much information as possible about the role the property plays in the administration and the administrators' intentions for it. The landlord should, preferably after taking legal advice, enter into correspondence clearly setting out its position. This will assist either in negotiating a satisfactory way forward or setting the scene in any Court application.

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