Rent as an administration expense
03 February 2010
Where an administrator occupies premises of a company in administration under a pre-existing lease for the purposes of carrying on the administration, the rent accruing after the date of occupation will be treated as an administration expense. Such rent must therefore be paid in priority to the claims of creditors in respect of floating charge security, preferential creditors and unsecured creditors.
The expenses of an administration are payable from the assets of the company in administration in priority to the claims of creditors in respect of floating charge security, preferential creditors and unsecured creditors (paragraph 99(3) of Schedule B1 to the Insolvency Act 1986 (the Act )). Rule 2.67(1) of the Insolvency Rules 1986 (the Rules) sets out a number of categories of administration expenses and the order of priority of payment as between themselves. Any expense falling into those listed in Rule 2.67 must be paid as an administration expense; payment is mandatory (not discretionary): In Re Toshoku Finance UK Plc  1 WLR 671.
Nortel Networks UK Limited (Nortel) was the tenant of premises under two long leases which pre-dated the administration. Since Nortel had been placed into administration, the administrators had been using the premises for the purposes of carrying on the administration (but only a small part of the premises) and rent had been paid to the landlord (albeit late on one occasion, for which interest on late payment was to be paid).
Both the administrators and the landlord wished to determine what liability there was to pay the rent. Liability to pay non-domestic business rates in respect of occupied properties as an administration expense was established in Exeter City Council v Bairstow (Re Trident Fashions plc)  4 All ER 437, but the position in relation to rent had been left unanswered. Hence, the landlord applied to court for an order that the administrators pay the full amount of the rent as it fell due as an administration expense. The administrators argued that the court had a discretion as to whether to treat rent as an administration expense and, as the administrators were using only a small part of the premises, any liability to pay rent should be limited to rent in respect of that part.
The court held that:
- where an administrator uses or retains leased premises for the benefit of the administration, the rent is payable as an administration expense. The Lundy Granite principle (from In Re Lundy Granite Co. ex p. Heavan (1871) 6 Ch App 462), whereby rent in respect of premises used or retained by a liquidator for the benefit of the liquidation is to be treated as an expense, applies equally to administrations;
- rent should be treated as an expense payable under either Rule 2.67(1)(a): as "expenses properly incurred" by the administrator in performing his functions in the administration of the company or under Rule 2.67(1)(f): as "necessary disbursements". The judge did not decide conclusively but his preference was to regard rent as falling due under Rule 2.67(1)(a);
- the use of only part of the premises did not limit the application of the Lundy Granite principle; the administrators could not pay only for the part of the premises which they were using. Further, the administrators were obliged to pay the full amount of the rent (that is, for the entire quarter payable in advance) as and when the rent became due and there was no scope to apportion the rent should the administrators vacate the premises before the end of the quarter. This was based on the principle that a liquidator/administrator could only elect to hold leasehold premises on the terms and conditions contained in the lease and any liability incurred while the lease is being enjoyed or retained for the benefit of the liquidation/administration (such as the rent for the quarter) is payable in full;
- the payment of rent as an administration expense is mandatory; there is no judicial discretion to determine whether something is payable as an administration expense or not. Discretion was relevant only in relation to potential remedies to be granted to a creditor (e.g. execution against assets for pre-administration rent); and
- the characterisation of rent as an expense was not necessarily determinative of when the rent should actually be paid and the landlord enjoyed no right to immediate payment.
In practice, most administrators do pay the rent for premises they use and therefore this decision is not likely to make much difference in real terms. However, it is useful in clarifying the position in respect of rent as this has been the subject of immense debate and uncertainty since the concept of administration expenses was introduced in September 2003. Some may argue (as indeed it was argued before the court in this case) that the decision runs counter to the main purpose of administration and the rescue culture generally, which was the focus of the changes in 2003. It will be particularly interesting to see if any attempt is made to challenge the court's ruling that rent is payable for the entire quarter even if the administrator vacates during that quarter as this could be seen as draconian and particularly contrary to the rescue culture.
Administrators should note that occupation of even a small part of the leased premises will, based on this decision, result in the rent for the entire leased premises being payable as a priority expense. In refusing to allow priority in respect of the occupied part only, the court was persuaded by the expert opinion of the landlord's chartered surveyor that there was no realistic possibility of maximising the rental value of the property while part of it was occupied by the administrators, with the resulting commercial prejudice to the landlord.
It should be emphasised that only rent that has accrued since the occupation of the premises by the administrator for the purposes of carrying on the administration will be treated as an expenses claim; the landlord will rank as an unsecured creditor with respect to pre-administration/pre-occupation rental arrears. Of course, determining when an administrator is in use or has retained premises for the benefit of the administration may not always be as straight forward as in this case. This decision may also give rise to consideration as to whether it may be possible in some cases to delay the appointment of an administrator until after the quarter date in order to avoid having to pay that quarter's rent as an administration expense.
Finally, the treatment of rent as an expense of the administration will not necessitate immediate payment of the rent by the administrator, particularly in a case where the assets of the insolvent estate may not be sufficient to cover rental and other liabilities of similar priority although this may, to some extent, depend upon whether rent is ultimately held to be an expense payable under Rule 2.67(1)(a) or under Rule 2.67(1) (f), (a) obviously sitting at the very top of the list. Both rank ahead of the administrator's own remuneration – and it would be unusual for an administrator to take on an administration where he did not think he would be paid!