After a period of relatively few tenant administrations, the recent announcements in relation to The Body Shop and Ted Baker have brought the administration process and its effect on the landlord and tenant relationship back into focus.
The impact on landlords will generally depend on the tenant's administrator's intentions for the relevant property. This article aims to answer some of the most common questions raised by landlords where commercial tenants enter into administration.
Will the administrator pay the rent?
This will depend on how the property is being used by the administrator. Case law has confirmed that rent which accrues during the period of administration is to be paid as an expense of the administration and calculated day to day for the period during which the property is retained “for the benefit of the administration”. If the administrator continues to trade from the property, or allows others to do so, then rent is likely to be payable as an expense of the administration. It may also be possible to claim rent as an expense of the administration if the property is closed to the public for trade but is otherwise used for the benefit of the administration, for instance if the property is used to store stock or fulfil online orders.
Expenses of the administration are paid out in preference to all other claims except the claims of secured creditors, so if rent is deemed to be an expense of the administration it is paid before the administrator’s own fees. It is therefore clearly of benefit to be able to argue rent as an administration expense.
If, however, the administrator is not using the property for the benefit of the administration, a claim for rent due during the period of administration will be an unsecured claim which usually results in a pence in the pound distribution.
Can the administrator unilaterally end the lease?
Administrators do not have the power to bring the lease to an end unilaterally (to be contrasted with a liquidator's power to disclaim onerous leases). Accordingly, where an administrator has no use for the property in question, it may seek to hand the keys back to the property and seek a surrender. There is no requirement for the landlord to agree to such a surrender if it does not want the existing lease to come to an end, but in circumstances where a landlord wishes to keep the lease in place, it must ensure that no steps are taken that are inconsistent with the ongoing nature of the lease.
Can the lease be forfeited and the premises re-let?
It is often difficult to remove a tenant once it has entered into administration. A company benefits from a moratorium as soon as it files for administration, which prevents certain legal steps being taken against the company unless the Court has given permission, or the administrator consents to such action being taken. These steps include commencing forfeiture proceedings, forfeiting the lease by peaceable re-entry or using CRAR as a method of recovering unpaid rent.
Depending on the administrator's intentions for the property and the viability of the tenant's business at the property, it may be possible to agree a surrender of the lease to facilitate a re-letting to a third party.
The administrator has allowed a third party into occupation without consent – what can be done?
Where the administrators are seeking to sell the company's assets to a third party, they will often let that third party into occupation of premises pursuant to a licence to occupy pending a formal application for landlord's consent to assign.
Allowing a third party into occupation without formal consent from the landlord will usually be a breach of the terms of the lease.
Whilst the moratorium on taking action against the tenant potentially complicates matters, a landlord in this scenario has various options including potentially seeking forfeiture of the lease as a result of the administrator's breach of the alienation covenants in the lease. Forfeiture will however require the leave of the Court or the consent of the administrator as noted above. Whether or not the leave of the Court is given will depend upon a number of factors including whether the property is needed to achieve the purpose of the administration and the detriment caused to the landlord if consent/permission is not granted – 'a balancing exercise'. Alternatively, if the landlord is prepared to grant consent to an assignment in principle, it may seek to provide consent on the requested terms, seek to negotiate better terms, or refuse consent to the assignment (provided there are reasonable grounds such as poor covenant strength or if inadequate security is being offered).
Landlords should take care in any responses to administrators or third parties in order to preserve their right to forfeit.
