Biggart Baillie Solicitors

How to Get The Rent Paid When Your Tenant is in Administration.

Wednesday, April 15, 2009

by Iain McHardy and Derek Ellery and Alistair Drummond

Many landlords are experiencing the effects of tenant administration. When a company goes into administration a moratorium takes effect which prevents a landlord form taking steps to terminate the lease without the agreement of the court or the administrator.  The rationale is that if the landlord ends the lease of important business premises then there is no possibility of a rescue of the company, which is the principal purpose of administration. 

What choices does a landlord have when the tenant goes into administration? The first issue is does the administrator need or want to use the property during the administration to trade the business? If he does, the landlord’s position is considerably improved.  The landlord must approach the administrator as soon as possible regarding the payment of the rent.

The landlord can propose:

• that the rent for the period of the administrators use of the property is an expense or outlay of the administration and must be paid as such in priority to other debts; or
  
• he can agree with the administrator for some payment of rent under the right of an administrator to do anything necessary or expedient for the management of the affairs, business and property of the company; 
  
• the landlord can apply to court to be allowed to terminate the lease.

The English insolvency rules give priority to 'expenses properly incurred by the administrator in performing his functions' and the Scottish rules to 'outlays properly chargeable or incurred by the [administrator] in carrying out his functions'. This means these expenses are paid ahead of all other payments out of the insolvent company’s assets, including the payment of the administrator’s own fees, payment of taxes and payment to secured and unsecured creditors.

There have been a number of cases in England about payments which will be treated as expenses during insolvency proceedings. In the leading House of Lords decision Lord Hoffman states that the court will interpret rule 4.218 (the rule regarding liquidation expenses) ordinarily to mean that rents due during the liquidation under a lease will be treated as coming within the definition of expenses.

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More recently the courts have looked specifically at expenses in an administration, as they related to payment of rates for a property occupied by an administrator and concluded that the rates were an expense to be paid in priority to all other creditors. 
This result was consistent with the effect of an administration as imposing a moratorium while not affecting the company's capacity to continue to trade and incur liabilities. It avoided any damage to the policy of promoting where possible the rescue and survival of companies or their businesses. The power of the court to direct payment, or to permit enforcement, ensured that the company in administration could not take unfair advantage of its continued occupation of premises at the expense (in this case) of local authorities and the general body of ratepayers.

This judgement lends support to the view that rent should also be treated as an expense of the administration. There are no reported Scottish cases on the issue, although it is likely that the courts would be heavily influenced by the English decisions.

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Expenses are payable in priority out of the assets realised by the administrator. The administrator can pay the expenses at the end of his administration, immediately prior to leaving office, although many administrators routinely pay the expenses as the administration progresses. The administrator will not want to agree to the treatment of liabilities as expenses where this super priority will jeopardise the administration as all other payments rank after expenses, including the administrators own fees. 

It may be expedient for him to pay something by way of rent to prevent an action for the whole of the rent as an expense or the termination of the lease, particularly where he considers that occupation of the property may continue for some time. He may seek to pay a reduced rent, but agree to pay this on an ongoing basis. This may have a cash flow advantage for the landlord rather than waiting for payment of expenses at the end of administration.

Only rent during the period of the administration when the administrator uses the property can benefit from payment as an expense. For rent outstanding when the company goes into administration, this will rank as a creditor and the administrator would require a court order to make a payment during the administration to a creditor other than a secured creditor.  Rent for a property the administrator does not use during the administration will similarly be left to rank as a creditor, but in that situation the administrator or the court is likely to agree to termination of the lease. This will also be the case for a property left behind when a ‘pre pack’ administration sale has taken place and the administrator is dealing with the landlords of the unwanted properties.

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Administration is supposed to promote the rescue culture, and in order to trade out of difficulties most businesses will need business premises. Administrators will not expect to be able to use properties for free and should agree some basis of payment with the landlord. 

Contacts
For more information email a member of our Retail Insolvency Team: Iain McHardy, Derek Ellery, Alistair Drummond or telephone 0131 226 5541 / 0141 228 8000.