Practical Conveyancing - Administration: The landlord's tale...

Administration is a process that provides a framework for the rescue of an insolvent company. When a tenant company enters into administration, a landlord is prevented from exercising certain rights against the tenant, including taking steps to forfeit the lease, unless it obtains the consent of the administrators or permission of the court. The administration procedure allows the company to be rescued or reorganised, or its assets realised under the protection of a ‘statutory moratorium’. Paragraph 43 of Schedule B1 to the Insolvency Act 1986 states:

(4) A Landlord may not exercise a right of forfeiture by peaceable re-entry in relation to premises let to the company except –

(6) No process (including legal proceedings, execution, distress and diligence) may be instituted or continued against the company or property of the company except –

In many cases the administrators will dispose of the business as a going concern, often as a ‘pre-packaged’ administration. This means that all the terms and negotiations for selling the business are concluded with the purchaser, prior to the actual administration. Completion takes place very soon after the appointment. The mechanism for dealing with the assignment of the leasehold property will be dealt with in the sale agreement, with, in most cases, a right for a purchaser to occupy premises on a licence pending the grant of landlord’s consent to assign. Difficulties can subsequently arise when the purchaser’s covenant is not acceptable to the landlord, or when the landlord raises an objection to the purchaser’s unlawful occupation, often in the context of several other breaches. It is therefore important that the landlord is prevented from forfeiting leases as, without the premises, the value of the business to a prospective purchaser may rapidly disappear.

From the landlord’s point of view, a tenant’s administration may have a profound impact as it may be owed arrears of rent and be unable, because of the statutory moratorium, to recover possession, find a new tenant, and re-establish its income stream.

From a property perspective, administration is about balancing the competing interests of the landlord and creditors as a whole. The recent case of Metro Nominees (Wandsworth) (No 1) & ors v K Rayment & ors [2006] considered a request made by a landlord to forfeit a lease held by a tenant that went into administration.

The facts in Metro

HPJ UK Ltd (UK) was granted a lease of a retail unit for a term of ten years, expiring in March 2007. Metro was the landlord. The alienation provisions contained an obligation on the tenant not to part with or share possession of the whole of the unit, not to assign the unit without the consent of the landlord (not to be unreasonably withheld) and not to underlet without consent. The lease contained a typical forfeiture clause which applied in the case of breach of covenant and also included a right of re-entry if the tenant went into administration.

UK went into administration on 11 January 2006. By 24 January 2006 the administrators had entered into an agreement to sell the business and assets of UK to HPJ Retailing Ltd (Retailing). The administrators agreed to assign any of UK’s leases to Retailing at its request. The agreement provided that Retailing should apply for the appropriate landlord’s consent.

Pending completion of any assignment, the administrators authorised Retailing to occupy premises (which included the unit) under a tenancy at will. This amounted to a breach of the alienation provisions.

At the point that UK was sold to Retailing, the rent was £8,000 in arrears, the alienation covenant had been breached as a result of Retailing’s occupation under a tenancy at will and the tenant was in administration.

The administrators wrote to Metro seeking consent to assign the unit to retailing. Metro refused consent based on the following:

Later, Metro wrote to the administrators pointing out that Retailing was trading from the unit. Metro requested consent from the administrators for the peaceful re-entry of the unit on the grounds of non-payment of rent. The administrators refused to grant consent.

In May 2006 Metro served a section 146 Notice on UK, exercising its right to forfeit the lease on the grounds of the unlawful occupation by Retailing and on account of the administration of UK. Metro once again requested the consent of the administrators to forfeit. They again refused, and stated ‘our clients would obviously prefer to resolve this matter by simply concluding the requested assignment to Retailing’.

As a result of the administrators’ refusal, Metro made an application to the court for permission either to peaceably re-enter or to commence proceedings.

The decision

The court granted Metro permission to commence proceedings to re-enter the premises, but not for immediate physical re-entry. Finding in Metro’s favour the court considered the Court of Appeal guidance given in Re Atlantic Computer Systems Ltd [1992], in particular that:

(1) these guidelines must not be regarded as a straightjacket, fettering the exercise of a general discretion;

(2) the general rule in the normal case is that if a creditor seeks to exercise a proprietary right that is unlikely to impede the achievement of the purpose for which the administration is being pursued, leave should normally be given;

(3) where there is a likelihood that the proprietary right will impede the achievement of the purpose of the administration, the court has to carry out a balancing exercise, considering the interests of the landlord and the interests of other creditors; and

(4) in carrying out that balancing exercise, great importance or weight is normally given to the proprietary interests of the landlord.

The court held that granting permission to Metro to commence proceedings would not disadvantage other creditors. In addition, as UK no longer needed the unit, granting permission to forfeit would not impede the achievement of the purpose of the administration. In assessing this the court need not have regard to the interests of Retailing.

Metro highlights the issue that landlords often encounter when a tenant goes into administration. The landlord can find itself with a third party in unlawful occupation and its remedies severely restricted.

In balancing the competing interests of the landlord’s proprietary rights and the tenant’s protection under a statutory moratorium, the courts will have regard to whether granting leave to forfeit impedes the purpose of the administration. In cases where an administrator has sold the assets of a company and no longer needs the premises, a landlord is likely to be in a stronger position to obtain the consent of the court to forfeit or issue proceedings.

Payment of rent in administration

There is a common misconception on the part of landlords that if the administrators trade from the premises, they will necessarily pay the rent as an expense of the administration. Expenses of an administration are those that are payable in priority to the administrator’s fees and other creditors. Generally administrators will argue that they do not have to treat rent or service charges as an expense of the administration. If they do so the rent will be a substantial item and puts the landlord ahead of other creditors and the administrator’s own remuneration.

On 2 March 2007 the High Court determined in the case of Exeter City Council v Bairstow & Ors that business rates constitute an expense of the administration and are therefore payable in priority to the administrator’s fees and charge holders’ debts.The case related to a claim by Exeter Council with reference to domestic rates accrued during the period when the administrators of the company were in control.The amount claimed was approximately £45,000.

Having regard to the insolvency rules and the case of Re Toshoku Finance UK Ltd [2002] (which determined that rates were payable as an expense of the winding-up in the case of a liquidation) the Court held that the rates must be an expense of the administration. It also held that there was no distinction to be made between business rates on occupied or unoccupied property.The case will undoubtedly cause insolvency practitioners some concern and is certainly a blow to the rescue culture promoted by the administration procedure. Richards J commented that, ‘The decision whether rates, corporation tax and other necessary disbursements are chargeable…as an expense in an administration... is a policy decision… Rates and corporation tax should rank as an expense in an administration’.The practical consequences of this decision remain to be seen, but as Richards J commented, there is a policy element which explains the Court’s decision.

The facts in Metro

The decision

Payment of rent in administration

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