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High Court ruling strengthens landlords' positions against tenants in administration
13 January 2010
It is usual for companies in administration to continue to
occupy leasehold premises after the company enters into
administration. Whether the administrator has to pay the rent
incurred in relation to this as an expense of the administration is
a key consideration for them.
This is important to landlords because expenses of the
administration are paid ahead of preferential creditors, floating
charge holders and unsecured creditors. Therefore, it is usual for
an expense to be paid in full. In the event that the rent was not
classed as an expense it would be an unsecured debt, which
typically receives a small number of pence in the pound if
that!
Until recently, the position in relation to rent incurred after
a company enters into administration has been unclear. As a rule,
administrators have resisted paying the rent as an expense,
claiming that it was at their discretion.
This was very frustrating for landlords as the moratorium which
exists when a company enters into administration means that a
landlord cannot take steps to forfeit a lease without first
obtaining the administrator’s consent or the permission of the
court. Therefore, a company in administration can effectively
occupy premises rent free, making it necessary for landlords to
incur legal costs to pursue the rent or forfeit the lease.
However, on Thursday last week the High Court decision in
Goldacre (Offices) Limited v Nortel Networks UK Limited (in
administration) [2009] EWHC 3389 (Ch) was published.
This gave important clarification on how an administrator must deal
with rent and the decision significantly strengthens the position
of landlords. The High Court held that, if the administrator causes
the company to use the leasehold property for the benefit of
creditors, the administrator must automatically pay rent that falls
due under the lease as an expense, whether or not the landlord
seeks payment.
This decision provided further useful guidance as the
administrator argued that, as only a small proportion of the
premises had been occupied it should follow that only a small
proportion of the rent should be payable. The court rejected this
argument and held that the occupation was subject to the full terms
and conditions of the lease.
Following this significant decision we now have clarification
that the administrator does not have discretion. Once the
administrator uses the premises for the benefit of the creditors
the rent automatically becomes an expense of the administration
within rule 2.67 of the Insolvency Rules 1986.
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