Landlords pay for tenant Insolvency.
The High Court has ruled that landlords have no priority over other creditors of an insolvent tenant to recover pre-insolvency rent arrears even when an Administrator or Liquidator makes subsequent use of their premises The purpose of Administration is to give insolvent companies a breathing space so that its business or assets can be disposed off to the benefit of its creditors. No creditor, including a landlord, can take any action against a company in Administration or Liquidation without first obtaining permission from the Court and, when deciding whether to grant permission, the Court will seek to balance the interests of the landlord with those of all the other creditors.
In the case of Goldacre (Offices) Ltd-v-Nortel Networks UK Ltd (2009) it was held that, when a Liquidator or Administrator retained premises for the benefit of the insolvency process, then, pursuant to the Insolvency Rules that govern corporate insolvency, rent that fell due was an expense properly incurred and/or a necessary disbursement and was therefore payable in priority to other debts. As rent payable in advance is not apportionable, landlords could recover as an expense of an Administration or Liquidation the entirety of all rents that fell due notwithstanding that the premises were not used for the whole of the relevant rental period or were only used in part.
It was considered following Goldacre that landlords only had priority where rents fell due during the course of an Administration and Liquidation and that there was no priority in relation to rents that had already fallen due for payment prior to a company being placed into Administration or Liquidation. This led to many tenant companies being put into Administration a day or so after a rent quarter day so that use could then be made of the premises for the remainder of the quarter without having to make any rental payment. It is notable that GAME went into Administration on 26 March 2012, a day after the March quarter day.
In the case of Luminar, 4 of its nightclubs were leased from X-Leisure companies and the relevant tenant companies all went into Administration in October 2011 with rent of some £220,000 outstanding for the quarter commencing 29 September 2011. The Administrators, Ernst & Young, continued to trade from the premises and paid the rents that fell due for the December 2011 and March 2012 quarters but refused to accept that the rent arrears for the September 2011 quarter were payable as an expense of the Administration in priority to all other debts.
The High Court agreed with the Administrators that the Insolvency Act 1986 only protected landlords where rent fell due for premises retained for the benefit of the Administration after the Administrators were appointed. There was no protection in relation to rents that had already become due. Accordingly, X-Leisure could not recover any rent for the September 2011 quarter although it could recover rents for subsequent quarters whilst the night clubs were still trading.
The effect of this Judgment is that Administrators can continue to put companies into Administration after a quarter day and to continue trading up to the next rental period with no liability to pay rent in priority to all other debts. In most cases, this will mean that the landlord recovers nothing.
The only possible remedy of a landlord would be to apply to Court to forfeit the lease but this takes time and money and is unlikely to enable the landlord to be able to evict the company before the next quarter day or force the Administrators to make any payment.
Ironically, at a time when so many retailers are seeking monthly rents and this is being strenuously resisted by landlords, this Judgment makes it clear that monthly rents will favour landlords when a tenant becomes insolvent as the tenant will only be able to remain in occupation for a few weeks before further rent becomes due.
Tenants and their insolvency advisers will argue that this Judgment is fair and the natural corollary to a tenant being liable for a whole quarter’s rent if rent does fall due during the time the premises are being retained for the benefit of the insolvency process. In the case of GAME, for example, there will be no liability to pay rent as an Administration expense up to 23 June 2012, but where premises are retained beyond that date, then the full quarter’s rent will be payable in priority even if trading stops during a quarter or the business sold during this period.
Clearly, the sensible solution for all parties is for rent to be payable simply for the days premises are used but new legislation would have to be introduced to achieve this.