are the scales tipping back to landlords and away from
administrators?
The recent and well publicised Goldacre decision has effectively
reversed the position described obiter in the Sunberry Logistics
case only last year (see our article of May 2009: click here to
view). In this article we digest the judgment in the context of the
overall administration regime and then seek to offer some practical
tips for administrators on dealing with its aftermath.
background
Nortel Networks UK Ltd ("Nortel") was the tenant of two premises
and they went into administration. They occupied part of both
premises and the remaining parts of both premises were occupied by
sub-tenants.
the facts
Since going into administration, Nortel had used a relatively
small part of both premises for the more efficient conduct of the
administration and rent had been paid to date. The issue for
decision was whether the rent that was about to fall due, and
future rent, would be payable as an expense of the administration.
The sub-tenants had received notices under section 6 of the Law of
Distress Amendment Act 1908 so the rights of Nortel to that rent
were transferred to the landlord.
the arguments
In summary, the arguments concerned whether future rent which
falls (as opposed to accrues) due during a period when premises are
used for the purposes of the administration of Nortel should be
paid as an expense of the administration and, if it is, would the
liability to pay that rent be affected by the period Nortel
occupied the premises or by the fact that Nortel only occupied part
of both premises.
Insolvency Rule 2.67 of the Insolvency Rules 1986 is at the
heart of this decision.
The relevant provisions of Rule 2.67 for this case provide:
"The expenses of the administration are payable in the following
order of priority – (a) expenses properly incurred by the
administrator in performing his functions in the administration of
the company..."
(f) any necessary disbursements by the administrator in the
course of the administration (including any expenses incurred by
members of the creditors' committee or their representatives and
allowed for by the administrator under Rule 2.63, but not including
any payment of corporation tax in the circumstances referred to in
sub-paragraph (j) below);..."
In summary, the landlord's arguments were:
- there is established authority that once the administrators
decided to continue to use any part of the properties for the
beneficial outcome of the administration that they are liable to
pay the rent as it falls due in full as an administration expense.
The landlord argued that the established authority is now dealt
with under the Insolvency Rules 1986 (Rule 2.67) and the landlord
also relied on the decision in Exeter City Council v Bairstow
[2007] 4 All ER 437 ( a case dealing with the liability for
business rates and which referred to the House of Lords case of In
Re Toshoku Finance UK plc [2002] UKHL 6 a liquidation case
dealing with corporation tax) which held that the expenses regime
set out in the Insolvency Rules is mandatory in the case of
administrations as well as liquidations
- in response to the point of the administrators that Rule 2.67
should be construed in accordance with the underlying importance of
the rescue culture contained within the Insolvency Act 1986, the
landlord argued that in a number of previous cases where the Lundy
Granite principle (sometimes referred to as the 'salvage principle'
or 'liquidation expenses principle') was developed, liquidators
often carried on businesses in an endeavour to sell them as going
concerns, for the purposes of winding up companies, and that this
is what administrators now do very often and that the Lundy Granite
principle should apply to administrations as well as to
liquidations
- the landlord argued that the administrators should not be able
to make payments simply tailored to the use that they were making
in respect of the premises. The landlord referred to Powdrill v
Watson [1995] 2 AC 394 (which was a case dealing with the adoption
of contracts of employment) and re Levi & Co Ltd [1990] 1 CJH
416 (a landlord and tenant case where the liquidator retained a
lease for the benefit of the liquidation and was held liable to pay
as a liquidation expense a dilapidations claim)
- the landlord argued that the quarter's rent, that was about to
become due, becomes payable in full from the relevant date as a
cost and expense of the administration and that it would not fall
to be apportioned in the event the administrators vacated the
premises during that quarter
- the landlord argued that the fact that Nortel only used part of
the premises should not result in an apportionment of the rent
due.
In summary the administrators, arguments were:
- that the Lundy Granite principle does not apply in the context
of administration expenses in this case. Indeed, it was argued that
the liability of a company in administration was not an expense of
the administration until the administrators or the court accepted
it as an expense
- that there is a difference between liquidations and
administrations in that the underlying importance of the rescue
culture upon which the Insolvency Act 1986 is based should not be
overlooked when the court construes the Insolvency Rules
- while not suggesting that the administrators were entitled to
occupy or use the premises for nothing, that payments should be
tailored to the use that they are making of the premises in this
particular case including the fact that Nortel only occupied some
and not all of both premises
- that the costs and expenses of the administration should be
apportioned in the event that the administrators vacated the
premises during the quarter in which rent was payable in
advance.
the decision
- Judge Purle QC agreed with the landlord's submission that the
questions in this case were to be considered exclusively by
reference to the Insolvency Rules. The judge said that: "….if the
rental liability falls within the rules, then that is payable as a
matter of a mandatory obligation, not as a matter of discretion,
either on the part of the administrators or on the part of the
court".
- The judge found that the Lundy Granite principle, under which
liquidators are held liable to pay rent as a liquidation expense
where the liquidators make use of or retain, for the benefit of the
liquidation, possession of leasehold premises, applies to
administration as it does to liquidation.
- The judge believed that rent in this case fell within Rule
2.67(1)(a) rather than under Rule 2.67(1)(f). However, he stated
that it was not necessary for him to reach a final view on that
particular point because if it did not fall within '(a)' then he
believed it fell within '(f)'. In the context of '(f)' the judge
stated: "The disbursement is a necessary one because the
application of the Lundy Granite principle requires rent to be
paid". It is worth noting that the judge in this respect rejected
the administrators' argument that a disbursement can only be
regarded as necessary if the administrators chose to make it or if
the court, founding itself upon some proper jurisdictional basis,
orders it. Having found that the Lundy Granite principle applied in
the case, the judge decided that as the rent falling due on the
next quarter date was a payment in advance, that it was not subject
to the Apportionment Act 1870 and that the rent becomes payable in
full from that date as a cost and expense of administration and
that there will be no apportionment in the event that the
administrators vacated during that quarter.
- Judge Purle stated that In Re Levi & Co Ltd (which was
approved in Powdrill v Watson) establishes: "that a liquidator
electing to hold leasehold premises can do so only on the terms and
conditions contained in the lease, and that any liability incurred
while the lease is being enjoyed or retained for the benefit of the
liquidation is payable in full as a liquidation expense. The same
principle in my judgment applies in an administration."
- The judge drew a distinction between the basis of the decision
by the Court of Appeal in Sunberry Properties Ltd v Innovate
Logistics Ltd [2008] EWCA Civ 1321 in that the main point in that
case was the discretion that the court had about the remedy being
sought by the landlord, which involved balancing the interests of
the landlord against the interests of the administrators, rather
than the question of whether a sum owed is an expense of an
administration. Judge Purle held that where it was found that a
debt was an expense of the administration there is no discretion on
the part of the court to hold that it is or is not an
administration expense. It either is an administration expense or
it is not an administration expense. It will be recalled that in
the Sunberry case the remedy being sought was that the landlord
should be able to bring proceedings requiring the administrators to
terminate an occupational licence for the six months granted by the
administrators to a third party in breach of covenants in the lease
which still had a considerable number of years to run. In the
Sunberry case, although it was not an issue that had to be decided
upon, the court commented that the landlord had no automatic right
to be paid the contractual amount during the occupation of the
company in administration. In Sunberry the administrators were
asked to pay the sums passing under the licence from the third
party. Judge Purle pointed out that the Court of Appeal, in
adopting a flexible approach as to what the administrators should
pay, did so as a result of a concession by the parties in that case
and the court did not consider the Lundy Granite line of
cases.
- Judge Purle made the point that the treatment of rent as a
liquidation or administration expense under the Lundy Granite
principle does not necessarily determine the point in time at which
rent should be paid. He said that if the amount of the realisable
assets is in doubt then the landlord may have to wait to see to
what extent the assets will be enough to satisfy his claim as there
may be other claims also having priority. That was not an issue in
this particular case because there were sufficient assets available
to pay the rent.
- Finally the judge made the point that it was common ground in
relation to the December rent that the premises, even if the
administrators now decided to give them up, would not be vacant.
Accordingly, the rent would continue to be payable as an
administration expense quarterly in advance while any part of the
premises were being used or retained for the benefit of the
administration. He did, however, make the point that if the
administrators were able to vacate the premises entirely then the
rental liabilities would cease to be payable as an administration
expense.
implications for insolvency practitioners
There is no appeal pending from this decision. Accordingly,
practitioners will have to deal with the decision as it stands as
best they can.
However, it is unlikely to be the last word in respect of
various matters raised by the judgment. It leaves us with many
unanswered questions, including:
- is it correct for the question of future rents as an
administration expense to be dealt with simply as a matter of the
Insolvency Rules without consideration of the purpose of a
particular administration in the context of the rescue culture
behind the administration legislation?
- is it really contrary to the Lundy Granite principle if there
is an apportionment made by time so that any rent payable is
limited to that which relates to the period of use by the
liquidator as In Re ABC Coupler & Engineering Co Ltd (No 3)
[1970] 1 All ER 650?
- what would constitute actual use of a premises for the benefit
of an administration? It would appear that the putting into
occupation of the premises of a third party (often the buyer of the
business and/or assets of the company in administration) in
contravention of the terms of the lease will be held to be for the
use or benefit of the administration but must that always be the
case in all circumstances?. Is it the use of the moratorium
protection as opposed to the premises which is, in part, the
issue?
- is it right that any liability incurred under the lease while
premises are being used for the benefit of the administration would
have to be paid as an administration expense? Dilapidation claims
may have arisen prior to the administration. Such claims might
arguably then acquire preferential treatment compared with other
creditors' claims incurred before administration. Is it right that
landlords should be afforded this benefit? In other areas, such as
protective awards, the courts have held that they should not be
given preferential treatment.
- presumably, the principle in this case could be held to apply
to other areas such as contracts of lease-purchase?
As matters stand, it appears that:
- assuming that the use of the premises is necessary to achieve
the purpose of the administration then the timing of any
appointment so as to avoid falling on a date when payments are due
under the lease will be important (but bear in mind that in many
leases a grace period of a number of days is added to the stated
payment dates) and vacation should be before the next date when any
payment is due
- if a buyer is to take occupation following administration then
the administrator should normally receive in advance from the new
occupier all payments that could be due under the lease so that the
administrator is not out of pocket. Of course, in current times
where credit is increasingly difficult to obtain, this may prove an
expense too far for many proposed buyers
- clearly, careful consideration of the position under a lease
will have to be given prior to any appointment and, if possible,
agreement should be reached with a landlord before the appointment
as to the terms upon which the premises may be used after
appointment. Of course, in many cases it will prudent to file a
notice of intention to appoint, in order to secure the benefit of a
moratorium, before entering into negotiations with the
landlord
- finally, this case does not, of course, change the basic point
that where an administrator uses leasehold premises for the benefit
of the administration then the rent that is due in respect of the
period of the use will be payable as an expense of the
administration. However, it makes it clear that if rent has been
paid for an advance period and the property is vacated before the
end of that period that there will be no question of a refund being
paid to the administrators.
