Vol 7 (2010) - Issue 5

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Goldacre: Is it a Shake up for the Administrator or for the Landlord?

A recent High Court decision has thrown into disarray the eminently workable modus operandi for the payment of rent by an in situ company in administration and its landlord.
A Liquidator's obligation to pay rent for a period of occupation during the liquidation has always been recognised as an expense of the liquidation.
However, the position in respect of rent payable by an administrator for periods of occupation post appointment was less clear but had for many years been (successfully) governed by the ruling in re Atlantic Computers, which although it applied specifically to an administrator's obligations in respect of a leasing contract, was logically extended to obligations to pay rent under a property lease.
The principle basically boils down to the administrator paying (as an expense of the administration) for the time he has beneficial occupation of a property or where he allows a third party into occupation of those premises for their own beneficial occupation.
The effect of this meant that with the benefit of a moratorium against peaceable re-entry and no fear of distress being levied by a landlord for pre-appointment arrears of rent, an administrator was free to occupy premises on what amounted to a daily occupancy rate. This enabled the administrator to adopt a flexible approach to both his own trading of a company and that of any tenants he allowed in under a short term licence who may have required occupation either to test out the suitability of the premises for the business they had taken over from the administrator (a particularly attractive option when acquiring multi-locational businesses such as retailers or restaurants) or to give the purchaser of the business time to negotiate more favourable lease terms with the landlord.
The administrator's only concerns were that he was adequately covered by the lessee for his exposure to the accruing rent under the prevailing lease and that he acted in a professional manner as regards notifying the landlord of his conduct over the property.
The relative simplicity of the Atlantic Computers principle was then turned on its head by the High Court decision of HHJ Pearle in the case of Goldacre (Offices) Limited v Nortel Networks Limited (In Administration).
Whilst the main thrust of the application was whether an administrator would only be liable for part of the rent pro rata to the amount of space he occupied, the case also determined that administrators who continue to occupy a company's premises have to pay the full (quarterly) rent passing under the lease as an expense of the administration and could not obtain relief for part occupation of the space.
Purle's view was that rent during an administration was an expense necessarily incurred by an administrator in performing his functions and that it falls within R.2.67(i) of the Insolvency Rules as an administration expense.
In his opinion, an administrator in being in occupation at the start of any rental quarter had effectively adopted the contract for that quarter, which could not be varied by reference to the amount of time the administrator had beneficial occupation. He stated that ‘the liability to pay rent is not treated as an expense having priority until (and lasts only so long as) the office holder makes use of or decides to retain the property'.
However, commentators have speculated that this interpretation clearly creates problems when assessing an administrator's liability for rent for periods of post appointment occupation which fall after the start of a rental quarter but before the start of the next.
It has been pointed out that if an administrator's appointment arises after a rental quarter has commenced then the contract between the Company and its landlord for rent that quarter is technically already in existence and is therefore not automatically adopted by an administrator subsequently appointed by remaining in beneficial occupation.
Of course this is arguably patently inequitable, giving an unfair advantage to a well timed administration, leaving an administrator with up to almost a quarter's occupation rent free and thereby forcing a landlord to apply to the Court for the forfeiture of the lease as a means of recompense.
Equally, any administrator who only needed to occupy premises for a matter of a few days or weeks at the start of a quarter in order to perfect a sale of a business is similarly disadvantaged when faced with a full quarter's rent and will be reluctant to expose himself to such a significant administration expense, not least as this would rank ahead of his fees.