Leases Saleem Fazal considers the monthly versus quarterly rents debate and how such agreements may be affected by tenant administrations
In light of the recent quarter day on 25 March, the issue of monthly rents in the commercial sector has risen up the agenda for landlords and tenants. The Property Managers Association is believed to have recently co-ordinated a campaign in advance of the latest quarter day alongside its retailer members, demanding that landlords agree to payment of rent on a monthly basis.
So why are monthly rents so popular? In the case of the commercial sector, a monthly rent agreement has obvious advantages for tenants. There are savings to be made in respect of interest charges and their employees and suppliers can be paid on time. Yet, for landlords, a request that the rents be paid monthly is a headache. Landlords have to take into consideration the additional administration costs, lost interest they would otherwise have earned, the impact of rent reviews and VAT issues. Landlords complain that most of their tenants do not need to pay rent monthly but are simply seeking to increase their profits at the expense of the landlords.
Importantly, if a monthly rent is agreed by both parties, it is imperative that a monthly rent agreement is properly documented, otherwise it may take effect as a variation of the lease. In this instance, it might inadvertently release any guarantors or former tenants – not good news in the current times. For that reason, there is another layer of costs for the landlord to bear to protect its position.
So in light of the above, is it all bad for landlords? It is possible to agree “monthly payment arrangement fees” which will compensate for the increased administration and other costs. In addition, there may be another hidden advantage to such an agreement, which will help if a tenant subsequently enters into administration.
Tenants in administration
The effect of a tenant going into administration is that a moratorium is imposed on legal proceedings. This means that a landlord cannot pursue its tenant for unpaid rent or seek to forfeit the lease without permission from the court. Therefore, a landlord is potentially stuck with its property being used without receiving any income.
As a result, landlords have been seeking payment of rent as an expense of the administration – meaning that the rent would in most cases be discharged in full ahead of ordinary unsecured creditors. However, administrators have not always been willing to treat rent in this way.
The current law is as set out by the High Court in Goldacre (Offices) Ltd v Nortel Networks UK Ltd (in administration) [2009] EWHC 3389. In this case, it was held that all rent that fell due after the date of the administration was payable as an expense of the administration. Further, in that case, the administrators were using only part of the premises. However, the court held that the full rent was still payable.
It might therefore sound easy, following Goldacre, for landlords to get paid. Unfortunately, this is not necessarily the case. There are two conditions for payment as an expense of the administration.
Firstly, the landlord has to demonstrate that the premises were being used by the administrators for the purposes of the administration. This is not always straightforward – for example, many premises are immediately closed down but goods may still be stored there temporarily.
Secondly, it is necessary for a payment of rent to fall due during the administration. To determine what this means, we can look at a couple of examples.
Implications of Goldacre
In the first example, a tenant goes into administration on 20 March. The administrators use the premises for the purposes of the administration but then vacate on 20 June prior to the next quarter day, 24 June. Following Goldacre, the landlord is entitled to claim the full quarter’s rent due on 25 March as an expense of the administration. This is the case even though the administrators did not stay for the whole quarter. However, any pre-administration arrears would have to be claimed by the landlord as an unsecured creditor when the tenant is eventually wound up.
In the second example, a tenant goes into administration on 30 March and has not paid the rent due on the preceding quarter day, 25 March. The administrators use the premises for the purposes of the administration but then vacate on 20 June prior to the next quarter day, 24 June. In this instance, how does the impact on the landlord differ? Can the landlord, for example, claim rent for the period from 30 March to 20 June as an expense of the administration following Goldacre?
Unfortunately, the position is uncertain. Administrators appointed in respect of Focus DIY last year argued that as a quarter day did not fall due during their use of the premises, they were not liable. Although proceedings were issued to determine this point, the case settled and so the point has yet to be tested.
Monthly rent agreement
If there was a monthly rent agreement in place with the tenant, the rent would fall due monthly and so it is more likely that landlords could make a claim following Goldacre. However, to achieve this result, the monthly rent agreement must be properly drafted so that it is binding on administrators. Alternatively, the agreement should provide for automatic termination of the agreement and for all rents for the quarter to be paid on the date that the tenant enters administration. This way the landlord has the best of both worlds.
Monthly rent agreements may not be as bad as landlords may think, assuming that they are properly drafted, of course.
Saleem Fazal is a partner and head of real estate disputes at Taylor Wessing
