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Dealing with a Tenant in Administration | Commercial Property

Tenant in Administration

Dealing with a Tenant in Administration | Commercial Property

We have seen a number of ‘household name’ retailers fall into administration over the past few years, including Comet, Blockbusters, Habitat, Woolworths and MFI to name but a few. But what does the impact of administration have on the tenancy agreements of these companies? To understand this, lets first establish what is administration…

What is administration?

Administration is a process whereby a company (or on occasion, a bank that has a registered security against the company’s assets) decides to transfer control to an external group. This external group will then act as the administrator over the company and the previous owners relinquish control.
The administrator is tasked with implementing measures that either rescue the company, or sell the company’s assets to pay any debts (as much as possible) owed to its creditors. If either of the above is not possible and the company cannot be saved, the administrator will then likely put the company into liquidation for the benefit of all concerned. In simple terms, with regards the company, this is akin to its death.
A key characteristic of the administration process is to grant an insolvent company a statutory moratorium (a period of stay) for one year. This is the intensive care phase and is designed to give the administrator some time to assess what has gone wrong and whether the company can be saved. It also means, generally, no creditor can take any legal action to recover debts owed by the company, including Her Majesty’s Revenue and Customs and even the landlord.
So… if you are a landlord the next question is, what now…?

Tenant in administration – payment of rent

The various difficulties a landlord faces with regards a tenant in administration are exacerbated by the provisions of the Insolvency Act 1986. In essence, a landlord is not permitted to instruct bailiffs to levy distress (i.e. to send bailiff’s to seize goods worth the value of the debt) against a tenant in administration. Forfeiture of the lease without permission from the administrator or via a Court order is also another issue.
Of course, the landlord’s primary concern is rent and it is possible to approach the administrator to ask them for rent to be paid as an expense of the administration process. In the case of Goldacre (Offices) v Nortel Networks UK Limited (in administration) 2010 it was found that if an administrator is in occupation of a property on a date that rent falls due, then it is liable to pay rent for the next rental period as an expense of the administration.
It isn’t all plain sailing however. We mentioned earlier that a tenant in administration will benefit from a statutory moratorium (the grace period of one year) which serves to freeze during that period.

Purpose Of Administration

Tenant in Administration

In a more recent case of Leisure (Norwich) II Limited v Luminar Lava Ignite Limited 2012, the Courts found where rent arrears had accrued before the administration had commenced, rent may not be paid as an expense of the administration. Accordingly, the landlord is unable to recover rent owed prior to the start of the administration – until after the statutory moratorium period has elapsed.
So, a landlord with a tenant in administration can ask for rent to be paid whilst the administrator is occupying a property but is not permitted to recover any sums owed to it before the tenant fell into administration.

The ramifications are wide reaching as usually debts mount well before the administrator starts work and so the landlord will likely get caught by the financial neglect of the tenant.

Conducting through due diligence at the time a lease is granted is therefore imperative. Although this article focuses on what happens when a tenant falls into administration, for further guidance on what to do to avail some protection, see the following link:
http://saracenssolicitors.co.uk/commercial-clients/commercial-law/commercial-property/what-should-a-landlords-solicitor-do

What if an administrator refuses to pay rent or refuses to forfeit the lease rendering the landlord stuck?

Tenant in administration – forfeiting the lease

Given that the Insolvency Act seemingly prohibits forfeiture of a lease against a tenant in administration, what can be done to protect the interests of the landlord?
The Courts gave guidance in the case of Atlantic Computer Systems Plc 1992 where a two staged test was established to determine whether or not it would be fair for a landlord to forfeit the lease of a tenant in administration. The test was deemed as follows:

1. Purpose of administration

The Courts will say that if a lease forfeiture will not affect the administrator’s goal of trying to:-
o rescue the insolvent company;
o achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up; or
o realise property in order to make a distribution to one or more secured or preferential creditors;
then permission to forfeit against the tenant in administration, should be given. The second stage of the test concerns the need for a balanced outlook.

2. Balance

If it can be shown that forfeiture of the lease may prejudice the administration, the Court will conduct a balancing exercise by weighing up the interests of the landlord against those of the insolvent tenant’s other creditors. In other words, which interest should be protected first, the landlord or the others owed money.
The upshot of this two stage test is that despite the previous judgment in the case of Leisure (Norwich) II Limited (highlighted above) i.e. payment of rent by the administrator – if in occupation – the Court cannot just ignore the landlord’s rights as the property owner.

Summary

The case of Leisure (Norwich) II Limited (highlighted above) has certainly made this area of landlord and tenant law slightly more complicated than before. Ultimately though, the Court is able to apply the principles of the Atlantic case to ensure that justice is achieved, preventing situations where unscrupulous tenants wait until the quarter date for rental payment has passed before they decide to enter administration.
Without doubt professional and urgent advice should be attained if you are faced with this type of issue. We are on hand if needed. Do call us if you feel we can assist.

Commercial Property Department

Photo Credits

Jim Pennucci

Morgaine

 



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