April 23, 2010

Commercial property e-Brief – Administrators must pay rent

‘Goldacre (Offices) Limited v Nortel Networks UK Limited (in administration)’

Crucially for landlords in these difficult times, the High Court has decided in a recent case that administrators must pay rent for premises they use as part of the administration.  Previously, this had been in doubt when the Court of Appeal in 2009 said that payment of rent is discretionary.

The landlord in this case (Goldacre) let a property to Nortel Networks, a company in administration.  The administrators had been using a small proportion of the leased premises since the date of the administration.

The court was asked to decide whether rent constitutes an expense of an administration and so ranks higher in the order of payments made from the assets of a company than payments made to creditors with floating charges, unsecured creditors and the remuneration of the administrators.

The court found in favour of the landlord and held that rent is indeed an expense of the administration and should be paid automatically and in full to the landlord.  The principle applies where the administrators use the premises for the benefit of the creditors and the court has no discretion to decide how much of the rent the administrators should pay.

The decision is clearly favourable for landlords but the following points should be noted:

  • While the decision clarifies that rent is ranked above other payments to be made from the assets of a company, the administrators can only pay the rent if there are sufficient assets from which to do so.  Tactically, the landlord may need to consider a reduction in the rent before the administrators decide to surrender the lease if the assets of the company are insufficient to pay the rent.
  • The decision confirms that rent is classed as an expense but it does not set out the extent of what is meant by rent.  It may be safe to assume that insurance rent or service charge payments will fall under the definition but there may be other sums for which the distinction is not clear.
  • It is likely that in the light of this decision, administrators will be much more aware of the exact timings of putting a company into administration, or indeed when vacating the premises.  We may see administrators waiting until after a rent falls due before being appointed to avoid paying the rent as an expense.