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High Court ruling strengthens landlords position against tenants in administration

12 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 administrators 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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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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