Rent and other liabilities can be payable as administration expenses
Question
Following Goldacre (Offices) Ltd v Nortel Networks (UK) Ltd (in administration) [2009] to what extent can a landlord claim post-administration rents and other lease charges as an expense of the administration?
Answer
The law has been clarified. Landlords are now in a stronger position to claim rents, service charges and other lease payments. They can claim for all lease liabilities in respect of the entire property provided that the liabilities fall due during the administrator’s occupation of any part of the premises. Such liabilities will be payable as an expense of the administration.
The decision of HH Judge Charles Purle QC in Goldacre has caused administrators considerable concern.
A question of purpose
Following Exeter City Council v Bairstow [2007] , the judge applied the reasoning in Re Toshoku Finance UK plc (in liquidation) [2002]. He declared that continuing rents are payable as an expense of an administration where the administrator retains or uses property for the purposes of the administration.
Although Goldacre does not specify that the continuing rents must be paid as they fall due, it provides that any rent or other liability falling due while the administrator uses the property for the purpose of the administration should be payable in full as an expense. In this respect, Judge Purle did not follow that part of the judgment of the Court of Appeal in Sunberry Properties Ltd v Innovate Logistics Ltd (in administration) [2008] that suggested that the court had discretion as to payment or the amount to be paid.
As the implications of the judgment are felt in the industry, the Insolvency Rules 1986 (that is, r 2.67, which deals with the priority of administration expenses) may be amended to afford some protection to administrators.
In the meantime, landlords are likely to pursue payments of rent (and other sums) as an expense. This may have a knock-on effect on the number of applications to court by administrators, under r 2.67(2) and (3) of the 1986 Rules, to vary the order of priority of expenses.
Applying the ruling, the retention of the property in order to effect an auction on site, to store goods or to market the premises for sale seem to fit with the office holder using or retaining the property. In the absence of agreement with the landlord, the rental liability will become an expense when and for so long as the administrator retains and uses the premises for any purpose.
In respect of administrations that commenced after 15 September 2003, landlords will seek to argue that any rents falling due during the period in which the administrator retained or used the property should rank as an expense of the administration within r 2.67(1)(a) or (f). As such, they will enjoy the statutory charge afforded to such expenses by para 99(3) of Schedule B1 to the Insolvency Act 1986 (to the extent that net realisations arise when the administrator vacates office).
Arguably, this has been the position since 15 September 2003 (when r 2.67 came into force). Thus, in principle, there is no reason why landlords could not seek declaratory relief confirming that rents and other liabilities falling due after this date should have ranked as administration expenses.
The amount of rent that will be payable as an expense will not necessarily be limited or pro-rated to the period of occupation or use by the administrator. Rather, it will be for any amount that fell due to be paid pursuant to the lease during that period of occupation or use. Moreover, even where the administrator is using only part of the property, and that part is separate from other parts, the entire rent will be payable as an expense so long as the administrator uses the property (or part of it) or retains it for the administration.
As Judge Purle observed: [in previous cases, it has been established that a] liq- uidator electing to hold leasehold premises can do so only on the terms and conditions contained in the lease, and that any liability incurred while the lease is being enjoyed or retained for the benefit of the liquidation is payable in full as a liquidation expense. The same principle in my judgment applies in an administration.
Other payments
On the same basis, if service charges or other payments fall due during the administrator’s period of occupation, they should be payable in full.
This is probably so even where the period of services relates to a previous period or in respect of a properly constituted request for payment on account of services to be provided in the future. The key point appears to be when, under the terms of the lease, the liability is incurred. It follows that liabilities arising under breaches of a tenant’s repairing covenant might rank as an expense of an administration.
Goldacre is not restricted to rents; it refers to “any liability incurred while the lease is being enjoyed or retained”. A dilapidations liability, therefore, may be incurred as an expense; in particular if, at the end of occupation, the landlord forfeits or accepts a surrender without releasing the tenant, the claim may crystallise.