Rent is payable as an administration expense

04/01/10

A recent High Court decision has established that where a tenant is in administration and the administrator continues to use any part of the leasehold property for the purposes of the administration, the full rent is payable as an expense of the administration. This is good news for landlords as an administrator is required to pay the expenses of the administration from the assets of the insolvent company ahead of most other creditors (preferential creditors, floating charge holders and unsecured creditors).

Whilst it has long been established that where a company in liquidation continues to use leasehold premises the rent amounts to an expense of the liquidation, there has been a lack of clarity as to how such rent should be treated where the tenant is in administration. A number of practitioners have taken the view that the administrator had a discretion as to whether rent should be treated as an expense of the administration, balancing the rights of the landlord with those of the other creditors. Some administrators would not even consider whether to meet rent as an expense of the administration unless the landlord demanded it or threatened to seek leave to forfeit the lease for non-payment.

In Goldacre (Offices) Limited v Nortel Networks UK Limited (in administration) [2009] EWHC 3389 (Ch) it was established that, if the administrator causes the company to use the leasehold property for the benefit of creditors, the administrator must automatically pay the rent that falls due under the lease as an expense of the administration, whether or not the landlord seeks payment. There is no element of discretion and the exercise of balancing the interests of creditors against the interests of the landlord does not apply.

In a liquidation context "use" of the property has been very widely construed; for an administration it would almost certainly include a situation where the administrator allows a purchaser of the business and assets of the company into occupation prior to the formalisation of such an arrangement. What's more, the administrator must pay the full rent that falls due under the lease, even if the company in administration only uses part of the leasehold premises.

This decision will be welcomed by landlords as it significantly strengthens their commercial position when faced with a tenant in administration. As the rent is an expense of the administration most administrators will pay it as it falls due. However, landlords do need to be aware that this decision does not oblige the administrator to pay rent immediately upon it falling due if he doesn't then have the funds to do so. Instead it establishes the priority of the landlord in recovering the rent and obliges administrators to ensure that, when deciding upon a strategy for the company, they make suitable arrangements to cover any rent.

Further information

If you have questions about any of the matters raised in this note we would be happy to discuss these with you. Please get in touch with your usual contact at BSDR.