Administration provides a breathing space for companies in financial difficulty. The legislation that underpins the regime is designed to help administrators rescue such companies, wherever possible. Consequently, the Insolvency Act 1986 provides that no legal process can be brought or continued except with the consent of the administrator or the permission of the court.
This means that landlords cannot issue proceedings to recover rent without permission. However, administrators often retain the use of premises while a company is in administration. Consequently, it is important for landlords and administrators to know whether rent is payable as an expense of the administration. If so, it will rank with other debts that must be paid first.
It had been suggested that the court has a discretion to decide whether rent should be treated as an expense of the administration: Sunberry Properties Ltd v Innovate Logistics Ltd (in administration) [2008] EWCA Civ 1261; [2009] 1 BCLC 145. However, Goldacre (Offices) Ltd v Nortel Networks UK Ltd (in administration) [2009] EWHC 3389 (Ch); [2010] PLSCS 17 confirms that rent for premises used by administrators does constitute an expense of the administration, even if the administrators are using only a relatively small part of the premises leased by the company.
The judge held that an administrator who elects to hold leasehold premises must do so on the terms of the lease and that any liability incurred while premises are retained for the benefit of the administration is payable in full as an administration expense. The judge also ruled that the rent falling due on the next quarter day was not subject to the Apportionment Act 1870 because it was due in advance: Ellis v Rowbotham [1900] 1QB 740. Consequently, the quarter’s rent was payable in full and was not liable to be apportioned were the administrators to vacate the premises during that quarter.
The administrators tried to persuade the court that they should pay only a proportionate amount of the rent, calculated by reference to the floorspace that they were occupying, because the landlord could use the rest of the property. The judge referred to Sunberry, and ruled that, if he did have to exercise a discretion to consider how much the administrators should pay, it would be fair for the administrators to have to pay all the rent because they had acknowledged that the company had sufficient assets to pay and there was no realistic possibility of the landlord maximising the return from the property until it was empty.
The fact that rent is an administration expense does not necessarily mean that the landlord should be allowed to forfeit or distrain immediately. The court can exercise its discretion over the remedies available to a landlord during the course of an administration. However, as a result of this decision, landlords do now know that rent will count as an expense of the administration while the administrator uses premises and, if the company has sufficient assets, that they will be paid at the end of the administration.
Allyson Colby is a property law consultant
