When is rent an administration expense?

The payment of rent as an administration expense is often a hotly debated topic between administrators and landlords. The 2008 decision of the English Court of Appeal in Innovate Logistics v Sunberry Properties had suggested that landlords had no automatic right to be paid rent as an administration expense and that the court should take a flexible approach in any particular case to determining the question.

17th February 2010

The payment of rent as an administration expense is often a hotly debated topic between administrators and landlords. The 2008 decision of the English Court of Appeal in Innovate Logistics v Sunberry Properties had suggested that landlords had no automatic right to be paid rent as an administration expense and that the court should take a flexible approach in any particular case to determining the question.
This led landlords and administrators to enter into negotiations as to how much rent would be payable as an expense. These negotiations often had very different outcomes depending on the circumstances of the case.

In the recent English High Court case of Goldacre (Offices) Limited v Nortel Networks UK Limited (in administration) a different approach was taken to the question of rent and administration expenses. The main points of the decision are:

  • Where a rent payment date falls within a period during which the administrators are using the property for the purposes of the administration, the whole rental payment will be an administration expense. The Court does not have a discretion. The judge also suggested that, in principle, the same applies to other sums (eg service charges) that become due during the period of use.
  • It is immaterial whether the administrators are only using part of the property and whether they continue to use it for the whole (or only part of) the period to which the rent or other payment relates. The whole of the relevant payment is an administration expense.
  • The administrators do not have to make the relevant payment on the date that it falls due if they think that the assets of the insolvent tenant will not be sufficient to pay all of the administration expenses in full. Other than in that situation, however, administrators should be making payment on the relevant due date.

Commentary

In general, the Nortel case puts landlords in a better position than was previously thought. There are certain points, however, which require to be clarified and which may form the basis of negotiations between landlords and administrators in the future. These include:

  • What constitutes "use for the purposes of the administration" in any particular case. In particular, the extent to which rent is payable as an administration expense if a purchaser of the business occupies the property on a licence after the completion of the sale is not clear.
  • The extent to which (and how much) rent is payable as an administration expense if it is due (but unpaid) prior to the date on which the tenant goes into administration, and the administrators cease to use the property before the next payment date.
  • Whether it is actually the case that absolutely all sums that become due under a lease in the period of use are administration expenses. Taken to its logical conclusion, such sums could, for example, include claims in relation to dilapidations prior to the date of the administration if those claims become payable under the lease during the period of use by the administrator.
  • Where part of the property is sub-let, and one of the sub-tenants does not pay (or is insolvent), the extent to which the rent and other sums that would otherwise be received from the sub-tenant can be deducted from the amount which is payable as an administration expense. 

In practice, the Nortel case is likely to increase the amount of pre-administration due diligence done in relation to lease terms, in order to identify the sums that may fall due during the period of intended use, and may mean that administrators choose not to trade from properties from which it would have been viable to trade under the flexible approach taken in the Sunberry case. It may also have an impact on the timing of administrations, with more tenants going into administration immediately after a rent payment date.

In addition, administrators will need to think carefully about the terms of any licence to occupy given to a purchaser of the business: the length of those licences, the extent to which licence fees will be required from the purchaser and the timing of the payment of those fees will become more significant in the negotiation of a sale.

Scottish aspects

The Nortel case involved the interpretation of Rule 2.67 of the Insolvency Rules 1986, which only apply in administrations of English and Welsh companies. The equivalent provisions of the Insolvency (Scotland) Rules 1986 (Rules 2.39B and 4.67) contain different wording. The Scottish courts have not yet made a decision on the circumstances in which rent will constitute an administration expense under the Scottish legislation. It is unclear whether they would take the same approach as in the Nortel case. We do, however, think that they would consider the Nortel case persuasive if they came to consider the issue.

Finally, where the Nortel case applies and a rent payment date occurs within the period that an administrator is using a Scottish property, the current uncertainty surrounding whether the landlord's hypothec applies to that rent (because it falls due after the date of administration) will become less of an issue as it will be payable as an expense. (For more information on the landlord's hypothec in Scotland, please click here).