The balancing act and rent claims in administrations

Two recent cases throw light on what landlords might expect if a tenant company goes into administration, reports partner Nick Cox.

In Innovate Logistics Limited (in administration) v Sunberry Properties Limited the administrators entered into a licence for six months with a third party (YHL) to occupy the leased premises on the very day of the administration order. YHL had bought Innovate’s business, but not the lease, from the administrators.

The Facts

• Acting as agent for the administrators, YHL were to fulfil contracts and collect Innovate’s book debts, which ran to several million pounds. The idea was to try to benefit the creditors. The only way this could be done, the administrators said, was to keep the premises open so that the stock could be moved. This was done without any approach to the landlord, Sunberry, who applied to the court to put a stop to the arrangement.
• The judge who first heard the case saw a flagrant breach of the covenant in the lease, preventing its assignment without landlord’s consent and granted Sunberry an injunction to terminate the licence, but the decision was reversed on appeal.
• It became clear that the real reason for the landlord’s actions had been to try to force YHL to take an assignment of the lease. At the same time the court agreed that a short-term licence would enable YHL to recover the book debts and benefit the creditors as a whole. They said there was no real damage to Sunberry’s interest in the property and the loss of ongoing rent could be balanced by YHL paying the licence fee to Sunberry direct. The purpose of the administration could not be achieved until the contracts were fulfilled and book debts realised. The key question was why was the administration entered into in the first place?

Comments

Typically, there is a balancing act to be struck between the purpose of the moratorium — usually to allow the administrator to achieve the purpose of the administration to the general benefit the creditors of the company —and the legitimate rights of the landlord.

Contrast this with the simple approach taken in Goldacre (Offices) Limited v Nortel Networks (UK) Limited (in administration). The judge here took a very straightforward view. He said that if the administrators kept using the premises, the landlord would be entitled to the ongoing rents as an expense of the administration. He decided that there was no balance to be struck between the interests of the landlord and the other creditors. The only question was, should the rent be viewed as an expense of the administration? If so, as here, they should be paid.

This will mean that landlords seeking only rent from the date of the administration should be paid in full from that date for as long as the administrators use the premises. The landlord jumps the queue ahead of other unsecured creditors.

Whether it opens the door to claims against administrators for other liabilities that arise, such as service charges that fall due during their use of premises and dilapidations, remains to be seen.

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