Vol 6 (2009) - Issue 4

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Dealing with Tenants in Administration

Introduction

The number of companies entering into administration under the UK insolvency regime in the last 18 months has grown considerably as a result of the continuing economic downturn. According to statistics provided by the Insolvency Service, over 5000 companies had entered into administration in 2008 – approximately double the respective figure in 2007. The visible effects of these statistics can be seen in the UK high street, where several high profile retailers such as Woolworths and MFI have succumbed to the ‘credit crunch’.

One of the major ‘victims’ of the rise in company administrations has been commercial landlords. There are many examples where tenants that are in financial difficulties have attempted to use the administration regime and, in particular, ‘pre-pack’ administrations, to renegotiate the terms of their leases, such as changing the frequency of rental payments (from quarterly in advance to monthly in advance) and requesting reductions in the agreed rent, or even rent free periods.

This article discusses the effect of company administrations on commercial landlords. In particular, those issues that are of foremost concern to a landlord with an insolvent tenant company are considered, namely: (i) what happens to any rent arrears that have accrued?; (ii) will the administrator be liable to pay the post-administration rent?; and (iii) how to deal with a purchaser (‘Newco’) under a ‘pre-pack’ administration and, if necessary, take back possession of the property.

The administration regime

Administration is a procedure under the Insolvency Act 1986 (as amended) (the ‘Act’) whereby a licensed insolvency practitioner is formally appointed as an administrator of the company acting as an agent of the company and managing its business and affairs. Immediately on entering administration the company is afforded the protection of a statutory moratorium from enforcement action by creditors to enable one or more of the objectives of the administration to be carried out.

Substantial changes were made to the administration procedures by the Enterprise Act 2002 with effect from 15 September 2003. This introduced three routes for a company to enter into administration. The first is by an application to the court, made by the company, its directors or one or more of its creditors. The second route is by ‘out-of-court’ appointment by the holder of a qualifying floating charge. Thirdly, an administrator can be appointed out of court by the company or its directors.

Once appointed, the administrator is given wide powers to manage the company’s business and realise its assets. An administrator is an officer of the court (whether subject to an ‘out-of-court’ appointment or not) and must carry out his functions in the interests of all creditors. The primary aim of an administration is to attempt to rescue a company in financial difficulties rather than to dissolve it.

The most significant problem for a landlord (who is normally an unsecured creditor) of a tenant entering administration is the imposition of a statutory moratorium. Once an application for administration has been made or a Notice of Intention to Appoint an Administrator has been filed with the court, the statutory moratorium comes into effect and a landlord may not exercise a right of forfeiture by peaceable re-entry or initiate or continue any legal process (including legal proceedings, execution or distress) against the tenant company or its property without the consent of the administrator or the permission of the court.