Landlords and Administrators- A continuing tension?

Friday 12 July 2013

Since the Goldacre decision in 2009, the law has been clear that the rents and service charges falling due whilst a company is in administration (and is occupying premises for the benefit of the creditors), will be treated as an expense of the administration and thus likely to be paid ahead of creditors – provided money is available.

The flip side of the decision is that such amounts that fell due before the Administrator’s appointment (but which covered at least part of the administration period) should not be treated as an expense of the administration, but as an unsecured debt. In that situation all the landlord can do is prove in the administration for that quarter’s rent as an unsecured creditor and hope for the best. The best rarely amounts to very much.

Following the demise of the Game business, this position could be about to change.

Game operated from numerous town and city centre premises around the country. Many of their leases had rents due quarterly in advance on the usual quarter days. Shortly after the quarter day, Game went into administration, and the administrators continued to use the premises while they sought a buyer. Even if they wanted to because rents were in arrears, landlords were prevented from forfeiting the leases and re-letting by the statutory moratorium on proceedings.

The Game administrators sold the business before the next quarter day and, in reliance on the established position, rejected claims from landlords for payment for their occupation as an expense.

Some of the landlords challenged this, and although the High Court felt obliged to follow the Goldacre decision, it was prepared to give permission to the landlords to appeal the decision to the Court of Appeal on an expedited basis. The High Court was persuaded to give permission on the basis that the question generally is of such importance to both landlords and administrators, and in particular in the Game case because the sums involved are so big.

It was not all one-way traffic though for the landlords. The buyer of the Game business from the Administrator (which as part of its purchase had given the Administrator an indemnity against claims from landlords) was also allowed to appeal. It in turn seeks to challenge the decision that where rents payable in advance did fall due during the administration period (when the property was being used for the purpose of the administration), that the whole quarter’s rent should be payable as an administration expense even if either the Administrator vacated the premises or exceptionally if the Lease was forfeited before the expiry of the relevant quarter.

A successful appeal by the landlords will certainly do something to mitigate the problems caused by insolvent tenants, which are always particularly hard to swallow where the sale is made to people previously involved in the failed business.

Whichever way the Court of Appeal goes on those appeals, it will still be necessary to apply for leave of the Court to forfeit the lease if the Administrator is using the building.  On that application the landlord has to show that the detriment to the landlord is greater than the advantage to the creditors of allowing the company in administration to maintain its use and occupation.