Goldacre (offices) Limited v Nortel networks UK Limited (in administration) [2009]
The recent case of Goldacre has brought administrations in line with the rule applied in liquidations that rent should rank as an expense of that insolvency process. Healys now review this case and consider the implications for both Administrators and Landlords.
The Facts
Goldacre (Offices) Limited (the Landlord) applied to the court for directions as to whether the rent due under a lease between the Landlord and the company in administration (the Tenant) was payable as an expense of the Administration.
The premises in question had since the date of administration been used for the more efficient conduct of the administration. However, only a small part of the premises was being used by the Tenant. The Tenant had negotiated sub-lettings of the other parts to third parties. The rents achieved under the sublet parts were being passed and paid to the Landlord.
The Ruling
The High Court decided that if a company in administration uses leasehold property for the benefit of its creditors, any rent that falls due during the period of use automatically ranks as an expense of the Administration under Rule 2.67 (1) (a) of the Insolvency Rules 1986.
It was decided that if the rent was not an expenses under Rule 2.67 (1) (a) then it was one of the necessary disbursements of the administration of the Tenant as per Rule 2.67(1)(f) of the Insolvency Rules.
The High Court held that the full amount of rent that had fallen due since the date of the Tenant’s administration, was payable as an expense. The Tenant was not able to reduce the amount payable on the basis that it was only using part of the premises.
The High Court followed the approach taken in decisions relating to the expenses of liquidation.
So, what has Changed?
Before Goldacre, the treatment of rent in administrations would be assessed by the balancing exercise established in the case of AIB Capital Markets Plc & Anor v Atlantic Computer Systems Plc & Ors [1990] EWCA Civ 2 (better known as the Atlantic Computers case).
Atlantic Computer’s approach to the treatment of rent was to balance the prejudice to the landlord in being denied the benefit of his property against the benefit to the creditors of the insolvent company arising from the continued use of the property. However, Atlantic Computers was a pre Enterprise Act 2003 administration.
In Goldacre, it was held that it was not bound to follow Atlantic Computers in relation to the ranking of the rent because there was no equivalent to Rule 2.67 under the pre-Enterprise Act Administration Regime. Consequently the reasoning in Atlantic Computers was not applicable to Goldacre.
It follows that there is now no question of balancing the interests of landlord against the interest of the creditors as a whole in determining rents payable in administrations. The matter is decided by a simple question as to whether the company in administration uses the leasehold premises for the benefit of its creditors.
It must be noted however that Goldacre has not changed the principles set out in Atlantic Computers as applies to applications to lift a moratorium.
What does this mean for Administrators?
This ruling will certainly alter the relationship between administrators and landlords. In many cases the administrator will now have to assume that he will have to provide for the full amount of rent that falls due whilst the company continues to use the premises
However, the rent will not become automatically by the tenant just because it enters an administration. Two criteria will need to be met before rent becomes payable as follows:
1. Use for the Benefit of Creditors
Firstly, the company in administration must use the premises for the benefit of creditors. Unfortunately no guidance is given as to what constitutes “use” of the premises for this purpose. It is our view that courts will look to cases decided in the context of liquidation expenses as guidance on this matter.
Certainly in the Goldacre case, partial occupation of the premises was held to constitute a use. It is only logical that occupation of the whole premises will constitute use.
However, what happens where an administrator simply allows the lease to subsist? It would seem unlikely that this in itself would constitute a use. If one looks at the case of Toshoku Finance UK Plc (in Liquidation) 2002 3 ALL ER 961 Lord Hoffman in that case commented that the failure of the liquidator to offer to surrender the lease did not cause the liquidator to accept the rent as an expense of liquidation.
Administrators should take care when using premises to keep assets because this will almost certainly constitute a use as held in the case of Linda Marie Limited (in Liquidation) 1988 4 BCC 463
Administrators should also be wary when dealing with sales in pre-pack administrations. It is likely that any licence given to a purchaser to occupy the business as a part of sale transaction will result in a “use” for these purposes. It would be advisable if a licence cannot be sought in advance of the pre pack, concise and watertight indemnities are obtained from the purchasers.
2. Payment in the period of use
The second criteria is that the rent falls due for payment in the period in which the company uses the premises for the benefit of its creditors
It follows therefore that if rent falls due for payment before the company in administration begins to use the premises for the benefit of its creditors, it will not rank as an expense even if it relates to the period in which the company occupies the premises.
However, where rent falls due in the period during which the company uses the property for the benefit of its creditors, the full amount of rent will be payable irrespective of what proportion of the premises are occupied by the company in administration.
Payment dates in leases may well determine the timescale for administrations because administrators are now likely to plan administrations to take effect immediately after the rent falls due under a lease to get around this.
What does this mean for Landlords?
Landlords can expect to be paid in full for rent that falls due whilst the company in administration uses leasehold premises for the benefit of its creditors.
Landlords are likely to be able to claim the full amount of rent payable irrespective of the length of the period occupied if the rent is payable in advance.
Following Goldacre, where the company in administration occupies only a proportion of premises, the landlord may still be able to claim the full rent. However, one should note that the High Court’s decision in Goldacre to this effect was based on the fact that the Landlord’s surveyor had demonstrated that the premises were not capable of being sub-divided and re-let as a whole as long as the administrators remained in occupation of that small part. Consequently where the unoccupied parts of premises are capable of being sub-divided and let separately, a court may hold partial rent is payable only.
Landlords must bear in mind that this does not necessarily mean administrators will have to immediately discharge the rents due under their leases. In accordance with the Insolvency Rules, administrators will not be obliged to discharge that rent unless and until they have sufficient assets to do so.
Although there is currently no authority on this, it is likely that Landlords will also try to claim to other sums under the lease which are defined to be payable as rent such as dilapidations and insurance sums owed.
Indeed, it may even be possible to apply this argument to owners of leased assets used by the company. However, our view is that administrators will fight for a narrow approach to be used until case law further explores the implications of this decision.
Should you require any further information about rents in administrations, please contact Melanie Badain on 01273 810071, email
