What is the effect of a company entering into administration, and will the rent be paid? Part 1 & 2

PART 1

On the 15th September 2014 Administrators were appointed for various Phones 4U businesses. The Administrators are now busy trying to salvage parts of the businesses. Hence it is a useful occasion for Landlords to remind themselves was is the effect of a company entering into administration, and will the rent be paid?

Administration is a procedure which can affect companies. It is a means by which a company which is in financial difficulties can undertake a re-organisation, or sell or otherwise dispose of assets under the protection of a statutory moratorium.

Upon entering into administration, an Administrator is appointed and s/he will take over from the company’s directors. The Administrator will be responsible for running the business and will take control over the company’s assets.

Administration is entered into for the purposes of achieving at least one of the following objectives

Primary objective
The rescue of the company as a going concern
Second objective
Achieving a better result for the company’s creditors than would be the case if the company was wound up or liquidated
Third objective
The realisation of assets belonging to the company to permit a distribution to one or more secured or preferential creditors

An Administrator must attempt to achieve the objectives of the administration in the above order.

However, once a company enters into administration, it becomes subject to a statutory moratorium. For landlords this means, without the consent of the court or the Administrator, they cannot

· distrain for non-payment of rent (i.e. seize goods);

· forfeit a lease by peaceable re-entry;

· begin or continue any court proceedings (including court proceedings for forfeiture of a lease); or

· take any steps to enforce any security (for example under a charged rent deposit).

Therefore, Landlord’s should always consider early action to protect their interests and to avoid the effect of the moratorium. The Landlord may recognise common indicators where a tenant is about to go into administration as follows

· Late payments of rent

· Suggestions of “restructuring”

· Tenant ceasing to trade

· A new occupier at the premises

If the Landlord acts quickly, he might be better able to protect his investment. In the next blog we shall ask the question – during administration, will the rent be paid?

PART 2

In our previous blog, we explained what was the effect of administration. In this blog we will consider the question – will the rent be paid?

So once a company enters into administration, the Administrator will take over the company’s affairs, and will then seek to achieve one of the objectives of the administration. The main objective is to save the company and the business, to keep the business running and to dispose of the business as a going concern. While this is happening, the company is protected from certain legal remedies by the statutory moratorium.

During the recession, the courts have had to consider whether during the administration, rent was payable by the Administrator as an expense of the administration. If it was an expense of the administration, the Landlord would be paid the rent in full (because the Landlord would thereby be a preferential creditor). If not, the Landlord would have to prove his claim in the same was as other creditors of the company.

In the case of Goldacre (Offices) Limited v Nortel Networks Limited [2009], the Court was faced with the following facts.

Example 1
· Commercial premises.
· The company had gone into administration by the relevant payment date
· A small part was being used by the Administrators
· The Administrators left before the next rent payment date
· Rent payable quarterly in advance
· Was the whole of the rent payable for the rent period as an expense of the administration, or just part?
Held that because rent payable in advance, the whole of the rent was payable as an expense of the administration even though only part of the premises were being used by the administrators.

So what would be the situation if the company went into administration after the relevant payment date?

This question was considered by the court in the case of Leisure (Norwich) II Limited v Luminar Lava Ignite Limited [2012]. Here are the facts

Example 2
· Commercial premises
· Rent payable quarterly in advance
· Rent was not paid on the due date
· After the rent payment date, the company entered into administration
· The company continued to occupy and trade from the premises at all times
· The administrators refused to pay the rent arguing it was not an expense of the administration.

Held, where
· rent payable in advance and
· falls due for payment before the commencement of the administration
it is not payable as part of the expense of the administration

And the court held this was the case eventhough the administrator retained the property for the purposes of the administration, and indeed continued to trade from the property for the whole of the rent payment period.

Both scenarios were considered unsatisfactory and unfair. In the Goldacre Example 1 situation, the whole rent had to be paid even though the administrator used a small part of the premises and vacated before the next rent payment date. In the Luminar Example 2 situation, the administrator could remain in possession for almost the entire rent payment period, without having to pay rent for that period.

As a result of these cases, it became common practice for companies to enter into administration shortly after a rent payment date.

These issues were considered by the Court of Appeal in Pillar Denton Limited v Jervis [2014]. The facts were these

Example 3
· Commercial premises
· Administrator appointed for the Game group of companies
· One of the Game companies was a tenant of many hundreds of leasehold properties
· Most of the rents payable quarterly in advance on the usual quarter days
· On 25th March 2012, approximately £10m in rent became due under the various leases
· The rent was not paid
· On 26 March 2012 the Game group entered into administration
· Some stores closed immediately
· Some continued trading and were quickly sold.
· Approximately £3m of the March 2012 rent remain unpaid
· The court had to consider whether part of an instalment of rent payable in advance can be treated as an expense of the administration in the context of insolvency.
· If not, the rent would simply be provable as a debt in the administration – with a slim chance of recovery. And the buyer would gain a wind fall of a rent free period
· If yes, the rent would be paid since the Landlords would be preferential creditors.

In a far reaching the decision, the Court of Appeal stated that Goldacre – Example 1 above and Luminar – Example 2 above were both wrongly decided.

Instead the court found

· The administrator must make payments at the rate of the rent for the duration of any period during which possession of the premises is retained
· Rent will be treated as accruing from day to day
· The payments are to be treated as an expense of the administration
· The duration of the period is a matter of fact
· The period is not determined merely by reference to whether the rent payment day falls before, during or after the period of possession.

The decision made by the Court of Appeal in the Game case seems much fairer and has been broadly welcomed by the Property industry. So now provided the property is being used by the Administrators for the purposes of the administration, the landlord should be paid rent for the relevant period in which possession takes place.

Written by Mark Sellers
Partner
PRINCE EVANS SOLICITORS LLP
Direct Line: 020 8799 1840
Fax Number: 020 8840 7757
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