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Tenants in administration - is there a shift towards protecting the landlord's interests?

When a tenant goes into administration, one of the administrators’ objectives is to achieve a better result for the company's creditors than would be likely if the company were wound up. 

The court has to balance the interests of the landlord and the other creditors of the company. A lot of attention will be given to the proprietary interests of the landlord, who should not be prejudiced by how the administration is carried out, except to the extent that this may be unavoidable. Even this will usually only be acceptable to a limited extent.

So, what will the courts take into account?

Will the landlord be able to forfeit the lease?

It is common for a lease to contain a clause that gives landlord the right to forfeit the lease if the tenant goes into administration. However, under the insolvency legislation, no action can be commenced against the company in administration without the consent of the administrators or of the court. This means that unless the administrators agree that the landlord can forfeit the lease, the landlord will have to apply to the court for leave to forfeit.

This is what happened in the recent case of Re SSRL Realisations Limited, in which the landlord successfully convinced the court that it should be able to forfeit the lease.

Administrators' delay

Delay was clearly a factor in the SSRL case. The administrators were appointed on 29 September 2014 but by 14 January 2015 all they had done was let a third party into occupation (in breach of the lease covenants). One of the reasons for this was that they were dealing with a pre-pack administration and were, therefore, focussing on assigning the lease to the purchaser of the tenant's assets. However, the landlord had indicated, fairly early on, that it would not consent to an assignment to this entity. This refusal by the landlord did not amount to an unreasonable refusal of consent to assign because the proposed assignee did not meet the test for an assignee that was set out in the lease.

This is a clear warning to administrators that delay will not be tolerated. There is a danger in focussing on one course of action, especially if the landlord's consent is required and this can validly be refused.

What does the lease say?

In the SSRL case the lease contained a right of pre-emption in favour of the landlord. This meant that the tenant had to offer to surrender the lease to the landlord instead of assigning it. If the landlord chose to exercise the right, it would have to pay a premium equal to the value of any consideration to be paid by the proposed assignee. Evidence was put forward as to the premium that would be paid by various proposed assignees. However, these were assignees that were not acceptable to the landlord. The level of the premium was also, in one case, based on an outside seating licence being available, although this was not part of the deal on the table. All of these negotiations about the premium that would be available in the market added to the general delay in the matter.

There was also an obligation on the outgoing tenant to provide an Authorised Guarantee Agreement (AGA). The administrators were not willing to provide an AGA on assignment and this was one of the reasons that the landlord refused to grant consent.

Ancillary documents that may influence the value of the leasehold interest

It is not uncommon for licences to be entered into alongside a lease. Common examples of situations in which licences are granted include a right to use an outside seating area (as in the SSRL case) or car parking spaces. Although the rights are not in the lease, they may be integral to the tenant's occupation and use of the premises. The landlord may have a discretion to terminate these arrangements and this may affect the value of the leasehold interest.  

Will rent be payable as an expense of the administration?

The Game litigation last year resolved the unfair position whereby a landlord could miss out on a whole quarter's rent when a tenant was placed into administration on or shortly after a rent payment date. Prior to that, rent was only payable as an expense of the administration if it fell due during the period of the administration. This was significant for landlords because if rent is an administration expense, they are more likely to be paid in full. If it is not an expense of the administration, the landlord will rank as an unsecured creditor and is likely only to receive a small proportion (if any) of the rent owed.

Now administrators have to pay rent as an expense of the administration at the appropriate rate of rent for the duration of any period during which they retain the premises for the benefit of the administration. This decision was a welcome relief for landlords.

What should administrators be doing?

  • Since the decision in the Game litigation, the date on which a company is put into administration is no longer critical. Prior to that, there had been suggestions by landlords that administrators were delaying putting tenant companies into administration until after a rent payment date so that they could use premises rent-free until the next rent payment date.
  • The court attaches great importance to the proprietary interests of the landlord. As the SSRL case shows, delay will not be looked on kindly.
  • Administrators should look at all the options. There is a danger, especially in pre-pack administrations, that all the focus is placed on one potential assignee. Consideration should be given to whether this assignee meets the test for assignees under the lease. If not, other avenues should be explored at an early stage.

Contributor: Alexandra Holsgrove Jones

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2015. Specific advice should be sought for specific cases. For more information see our terms & conditions on www.TLTsolicitors.com

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