Real Estate seminar 21 May 2010

21 May 2010 Real Estate seminar Tenants in administration: Making the best of a bad job Paul Rippon Consultant Solicitor Insolvency and Business Recovery team

Goldacre (Offices) Limited v Nortel Networks Limited (in administration) [2009] EWHC 3389 (CH) Considered whether rent falling due in respect of property held by a company in administration was payable as an expense of the administration; Held that where an administrator uses any part of leasehold property for the beneficial outcome of the administration then rent falling due (note not accrues) will be payable as an expense of the administration under the terms of the lease; and Such rent will continue to be payable for so long as the administrator retains or uses any part of the property for the benefit of the administration.

Why entitle this talk ‘Making the best of a bad job?’ The decision raises as many questions as it seems to answer. Uncertainty is unhelpful for landlords and tenants and their advisers (and possibly others in a similar relationship). Concern among insolvency lawyers that fundamental basis of decision flawed. We have to look at the case to fully appreciate the above point.

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 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.

Insolvency Rule 2.67 of the Insolvency Rules 1986 Insolvency Rule 2.67 of the Insolvency Rules 1986 is at the heart of this decision and the relevant provisions for the case are: “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 …”

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 decisions in Exeter City Council v Bairstow (a 2007 case on liability for business rates) and the case of in Re Toshoku Finance UK plc 2002 (a liquidation case dealing with corporation tax).

The landlord’s arguments (continued) That the Lundy Granite principle (sometimes referred to as the 'salvage principle' or 'liquidation expenses principle') developed under various liquidation cases should apply to administrations as well as to liquidations.

The landlord’s arguments (continued) The administrators should not be able to make payments simply tailored to the use that they were making in respect of the premises. The quarter's rent, that was about to become due, became 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 fact that Nortel only used part of the premises should not result in an apportionment of the rent due.

The administrator’s 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. The underlying importance of the rescue culture under the Insolvency Act 1986 as amended by the Enterprise Act 2002 should not be overlooked when the court considers such issues.

The administrator’s arguments (continued) 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 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 Decision (continued) 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 Decision (continued) 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)' .

The Decision (continued) 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. 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.

The Decision (continued) Judge Purle commented: "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 Decision (continued) The judge drew a distinction between the basis of the decision by the Court of Appeal in Sunberry Properties Ltd v Innovate Logistics Ltd (a 2008 case) in that the main point in that case was the discretion that the court had about the remedy being sought by the landlord 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.

The Decision (continued) 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.

The Decision 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.

Where are we now? There is no appeal pending. We all have to deal with the decision as it stands as best we can. It is unlikely to be the last word in respect of the matters raised and some of the unanswered questions include: 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?

Where are we now? (continued) 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? What would constitute actual use of a premises for the benefit of an administration?

Where are we now? (continued) 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? Presumably, the principle in this case could be held to apply to other areas such as contracts of lease- purchase?

However: 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. If a buyer is to take occupation following administration then the administrator on behalf of the tenant company should normally receive in advance from the new occupier all payments that could be due under the lease.

However: (continued) 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. In many cases the tenant company will file a notice of intention to appoint, in order to secure the benefit of a moratorium, before entering into negotiations with the landlord.

However: (continued) This case does not 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. If rent has been paid for an advance period and the property is vacated before the end of that period there will be no refund.

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Real Estate seminar 21 May 2010

by Blake Lapthorn on May 21, 2010

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Real Estate seminar 21 May 2010 — Presentation Transcript

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