Blake Lapthorn's Real Estate team held a seminar entitled 'tenants in administration: making the best of a bad job' in its Southampton office on Friday 21 May 2010.

1. 21 May 2010
Real Estate seminar
Tenants in administration: Making the best of a bad job
Paul Rippon
Consultant Solicitor
Insolvency and Business Recovery team

2. Goldacre (Offices) Limited v Nortel Networks
Limited (in administration) [2009] EWHC 3389 (CH)
Considered whether rent falling due in respect of property held
by a company in administration was payable as an expense of
the administration;
Held that where an administrator uses any part of leasehold
property for the beneficial outcome of the administration then
rent falling due (note not accrues) will be payable as an
expense of the administration under the terms of the lease; and
Such rent will continue to be payable for so long as the
administrator retains or uses any part of the property for the
benefit of the administration.

3. Why entitle this talk ‘Making the best of a bad job?’
The decision raises as many questions as it seems to answer.
Uncertainty is unhelpful for landlords and tenants and their
advisers (and possibly others in a similar relationship).
Concern among insolvency lawyers that fundamental basis of
decision flawed.
We have to look at the case to fully appreciate the above point.

4. Background
Nortel Networks UK Ltd ("Nortel") was the tenant of
two premises and they went into administration.
They occupied part of both premises and the
remaining parts of both premises were occupied by
sub-tenants.

5. The Facts
Since going into administration, Nortel had used a relatively
small part of both premises for the more efficient conduct of the
administration and rent had been paid to date.
The issue was whether the rent that was about to fall due, and
future rent, would be payable as an expense of the
administration.
The sub-tenants had received notices under section 6 of the
Law of Distress Amendment Act 1908 so the rights of Nortel to
that rent were transferred to the landlord.

6. Insolvency Rule 2.67 of the Insolvency Rules 1986
Insolvency Rule 2.67 of the Insolvency Rules 1986
is at the heart of this decision and the relevant
provisions for the case are:
“The expenses of the administration are payable in
the following order of priority –
(a) expenses properly incurred by the administrator in
performing his functions in the administration of the
company;
(f) any necessary disbursements by the administrator in
the course of the administration …”

7. The landlord’s arguments were:
There is established authority that once the administrators
decided to continue to use any part of the properties for the
beneficial outcome of the administration that they are liable to
pay the rent as it falls due in full as an administration expense.
The landlord argued that the established authority is now dealt
with under the Insolvency Rules 1986 (Rule 2.67) and the
landlord also relied on the decisions in Exeter City Council v
Bairstow (a 2007 case on liability for business rates) and the
case of in Re Toshoku Finance UK plc 2002 (a liquidation case
dealing with corporation tax).

8. The landlord’s arguments (continued)
That the Lundy Granite principle (sometimes referred
to as the 'salvage principle' or 'liquidation expenses
principle') developed under various liquidation cases
should apply to administrations as well as to
liquidations.

9. The landlord’s arguments (continued)
The administrators should not be able to make payments simply
tailored to the use that they were making in respect of the
premises.
The quarter's rent, that was about to become due, became
payable in full from the relevant date as a cost and expense of
the administration and that it would not fall to be apportioned in
the event the administrators vacated the premises during that
quarter.
The fact that Nortel only used part of the premises should not
result in an apportionment of the rent due.

10. The administrator’s arguments were:
That the Lundy Granite principle does not apply in the
context of administration expenses in this case.
Indeed, it was argued that the liability of a company
in administration was not an expense of the
administration until the administrators or the court
accepted it as an expense.
That there is a difference between liquidations and
administrations. The underlying importance of the
rescue culture under the Insolvency Act 1986 as
amended by the Enterprise Act 2002 should not be
overlooked when the court considers such issues.

11. The administrator’s arguments (continued)
While not suggesting that the administrators were
entitled to occupy or use the premises for nothing,
that payments should be tailored to the use that they
are making of the premises in this particular case
including the fact that Nortel only occupied some and
not all of both premises.
That the costs and expenses of the administration
should be apportioned in the event that the
administrators vacated the premises during the
quarter in which rent was payable in advance.

12. The Decision
Judge Purle QC agreed with the landlord that the
questions in this case were to be considered
exclusively by reference to the Insolvency Rules.
The judge said that: "….if the rental liability falls
within the rules, then that is payable as a matter of a
mandatory obligation, not as a matter of discretion,
either on the part of the administrators or on the part
of the court.”

13. The Decision (continued)
The judge found that the Lundy Granite principle -
under which liquidators are held liable to pay rent as
a liquidation expense where the liquidators make use
of or retain, for the benefit of the liquidation,
possession of leasehold premises - applies to
administration as it does to liquidation.

14. The Decision (continued)
The judge believed that rent in this case fell within
Rule 2.67(1)(a) rather than under Rule 2.67(1)(f).
However, he stated that it was not necessary for him
to reach a final view on that particular point because
if it did not fall within '(a)' then he believed it fell within
'(f)' .

15. The Decision (continued)
Having found that the Lundy Granite principle applied
in the case, the judge decided that as the rent falling
due on the next quarter date was a payment in
advance that it was not subject to the Apportionment
Act 1870.
The rent becomes payable in full from that date as a
cost and expense of administration and that there will
be no apportionment in the event that the
administrators vacated during that quarter.

16. The Decision (continued)
Judge Purle commented: "that a liquidator 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."

17. The Decision (continued)
The judge drew a distinction between the basis of the
decision by the Court of Appeal in Sunberry
Properties Ltd v Innovate Logistics Ltd (a 2008 case)
in that the main point in that case was the discretion
that the court had about the remedy being sought by
the landlord rather than the question of whether a
sum owed is an expense of an administration.
Judge Purle held that where it was found that a debt
was an expense of the administration there is no
discretion on the part of the court to hold that it is or
is not an administration expense.

18. The Decision (continued)
Judge Purle made the point that the treatment of rent
as a liquidation or administration expense under the
Lundy Granite principle does not necessarily
determine the point in time at which rent should be
paid.
He said that if the amount of the realisable assets is
in doubt then the landlord may have to wait to see to
what extent the assets will be enough to satisfy his
claim as there may be other claims also having
priority.

19. The Decision
It was common ground in relation to the December rent that the
premises, even if the administrators now decided to give them
up, would not be vacant.
Accordingly, the rent would continue to be payable as an
administration expense quarterly in advance while any part of
the premises were being used or retained for the benefit of the
administration.
He did, however, make the point that if the administrators were
able to vacate the premises entirely then the rental liabilities
would cease to be payable as an administration expense.

20. Where are we now?
There is no appeal pending. We all have to deal with
the decision as it stands as best we can.
It is unlikely to be the last word in respect of the
matters raised and some of the unanswered
questions include:
is it correct for the question of future rents as an
administration expense to be dealt with simply as a
matter of the Insolvency Rules without consideration of
the purpose of a particular administration in the context
of the rescue culture behind the administration
legislation?

21. Where are we now? (continued)
Is it really contrary to the Lundy Granite principle if
there is an apportionment made by time so that any
rent payable is limited to that which relates to the
period of use by the liquidator?
What would constitute actual use of a premises for the
benefit of an administration?

22. Where are we now? (continued)
Is it right that any liability incurred under the lease
while premises are being used for the benefit of the
administration would have to be paid as an
administration expense?
Presumably, the principle in this case could be held to
apply to other areas such as contracts of lease-
purchase?

23. However:
Assuming that the use of the premises is necessary
to achieve the purpose of the administration then the
timing of any appointment so as to avoid falling on a
date when payments are due under the lease will be
important.
If a buyer is to take occupation following
administration then the administrator on behalf of the
tenant company should normally receive in advance
from the new occupier all payments that could be due
under the lease.

24. However: (continued)
If possible, agreement should be reached with a
landlord before the appointment as to the terms upon
which the premises may be used after appointment.
In many cases the tenant company will file a notice of
intention to appoint, in order to secure the benefit of a
moratorium, before entering into negotiations with the
landlord.

25. However: (continued)
This case does not change the basic point that where
an administrator uses leasehold premises for the
benefit of the administration then the rent that is due
in respect of the period of the use will be payable as
an expense of the administration.
If rent has been paid for an advance period and the
property is vacated before the end of that period
there will be no refund.

26. Question Time