This case is important for landlords seeking to recover rent from companies which have gone into administration.

Background Facts

Nortel Networks UK Limited (“Nortel”) entered into two long term leases of commercial properties. Nortel subsequently went into administration. Parts of the premises were sublet by Nortel and Nortel’s administrators (the “Administrators”) used part of the premises which were not sublet for the benefit of the administration.

Goldacre (Offices) Limited (“Goldacre”) applied to the High Court to determine whether rent, due to become payable on the next quarter date, was payable as an administrative expense.

Goldacre argued that once the administrators had decided to use part of the premises for the beneficial outcome of the administration they became liable for the rent as it fell due as an administrative expense under the Insolvency Rules 2009 (the “Insolvency Rules”).

The Administrators argued that the rules for liquidations were distinct from the rules for administration and that whether rent is an administration expense should be at the discretion of the administrator or the Court. The Administrators were not seeking to argue that they should be paying no rent at all but that they should only be liable for that part of the premises which they occupied and only for the time they occupied it.

The Decision

The Judge decided that it is mandatory for administrators to determine whether rent is an administrative expense when they occupy leasehold premises for the benefit of an administration by reference to the Insolvency Rules.

Under Rule 2.67(1)(a) of the Insolvency Rules administration expenses include “any expenses properly incurred by the administrator in performing his functions in the administration of the company”. Under Rule 2.67(1)(f) administration expenses include “any necessary disbursements by the administrator in the course of the administration”.

The Judge considered that the rent liability in this case came within the meaning of an administrative expense under Rule 2.67(1)(a), as the rent would be a sum payable in respect of a liability incurred by the administrator in performing his functions. The Judge further held that if the rent in this case did not come within Rule 2.67(1)(a) then it would fall within Rule 2.67(1)(f).

The Judge construed the rules in accordance with the underlying importance of promoting the rescue of companies involved in insolvency procedures. In cases where administrators continue to occupy premises it is usually done to try to keep the business going until a buyer can be found and so the payment of rent would be a payment for an expense incidental to the performance of the administrators’ duties

The Court then considered the Administrator’s argument that they should only pay rent for that part of the premises which they were occupying and only for the time they were in occupation. The Court looked at case law on liquidations, which states that where a liquidator adopts a contract, such as a lease, for the benefit of a liquidation, then it does so subject to the terms and conditions of that contract. Therefore, a liquidator would be liable for any sums payable such as rent. The Court held that this principle was the same in the case of an administration and so full rent was payable by an administrator as long as they remained in occupation.

Under the terms of Nortel’s lease, the rent was payable in advance in full on the quarter date. This meant that the full amount would need to be paid by the Administrator if they remained in occupation. The Court made it clear that the Administrator would not be entitled to a refund if it gave up occupation part of the way through a quarter as a payment in advance could not be apportioned under the Apportionment Act 1870.

The Court added that even if the amount of rent the Administrator was liable to pay was at the discretion of the Court it would still have found that the Administrator was liable to pay the whole of the rent due as the landlord could not realistically maximise the return from the property so long as the Administrator was in occupation.

Comment

The case is important in confirming that payment of rent due on a leasehold property by a company in administration is deemed to be an administrative expense if the administrator is using the premises for the benefit of the administration.

This places landlords in a stronger position as, once payment of the rent is considered an administration expense, the landlord will be able to recover rent payments in priority to unsecured creditors.

For further information please contact Simon Geoghegan or the partner with whom you normally deal