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Thursday, 29 March 2012

Free Quarter for Administrators Strengthens Case for Monthly Rents

The High Court has made an important ruling this week that potentially lets administrators off the hook for a whole quarter’s rent.

That’s the result of the currently unreported case of Leisure (Norwich) II Limited v Luminar Lava Ignite Limited (in administration), and there’s a very good summary of the legal issues and the history behind the case on the UKLegalEagle Blog.

In short, the High Court has decided that where a company goes into administration, any unpaid rent which fell due before the appointment of the administrators will be an unsecured claim against the company and not an expense of the administration, even if the administrators continue to use the property.

There’s little chance of a landlord being able to recover an unsecured claim.

So if the rent is paid quarterly and administrators are appointed the day after the quarter day, then no rent is payable as an expense of the administration until the next quarter day – effectively giving the administrators a free quarter’s trading.

Ironically, this case has come about in the aftermath of the decision in Goldacre which established that administrators could no longer calculate rent on a daily basis but rather had to pay for the full quarter. 

There’s more commentary on the Goldacre case too on the UKLegalEagle Blog.

Tenants and administrators will see this as a welcome opportunity to trade a company back into solvency and save jobs, although there will be no flexibility when the next quarter day comes round.

Landlords however are likely to feel cheated; and will think the High Court has just legalised a limited period of commercial squatting.

Perhaps the pre-Goldacre pay-as-you-go approach to rents was the fairest one after all.

The other irony of this situation is that it's likely to strengthen a tenant’s hand if it wants to ask its landlord to accept payment of rent monthly, rather than quarterly, to help cash-flow.

That’s something the British Retail Consortium has been advocating for years, but which the British Property Federation has felt should only be a concession to those in need, rather than healthy businesses trying to exploit an opportunity to change their terms of trade.

Landlords might however feel more inclined to switch to monthly rents now because they risk only losing a month’s rent rather than a whole quarter if the tenant goes into administration.

There's now an incentive for both landlords and tenants to shift towards monthly rather than quarterly rents (see this briefing note from Forsters for further commentary).

The detailed judgment in the Luminar case has now been released, setting out the rationale for the decision and summarising the position on rents in administration generally.

The case hasn’t been reported yet on Bailii, so there’s no link to the judgement yet, but here's a useful explanation from CMS Cameron McKenna.

Where rent becomes due during, rather than before, the period when an liquidator or administrator is retaining the property for the purposes of the liquidation or administration then the whole sum is payable as an expense, even if the liquidator or administrator gives permission to forfeit the lease or vacates the property before the end of the relevant quarter or month to which the advance payment relates.  In other words, a full quarter’s rent is payable where rent is payable on a quarterly basis.  This was the decision in the Goldacre case.

Cameron Mckenna suggest areas for consideration include:

·         amending leases to provide for monthly rents in advance;

·         amending leases to provide for rent to accrue on a daily basis with an “on-account” payment each quarter;

·         amending rent concession letters to ensure that monthly rent concessions amend the lease rent payment dates as an agreed variation;

·         acting swiftly, where appropriate, in seeking the consent of the administrators to forfeit the lease and take control of the property.  Cameron Mckenna comment that this is the only real remedy available (although not guaranteed) to landlords in relation to administrations or liquidations commencing shortly after a quarter day;

·         acting quickly, openly and fairly with the administrators in order to put a landlord in a better position, should an application to the court be required to permit forfeiture of the lease.

So the case for monthly rents seems to have been strengthened, albeit only as a bi-product of this judgment.

Luminar may be appealed.

Many however will agree with Cameron McKenna’s verdict that Parliament should review the fairness of the position in which the law now leaves both landlords and administrators, depending on the timing of the insolvency, and legislate for rent to be paid for the period during which the property is retained for the purposes of the administration or liquidation of the tenant. 

Wednesday, 7 March 2012

Subtenants - What Happens if Your Landlord Goes Bust?

If you're thinking of taking a sublease, you’d be wise to do some due diligence on the financial health of your prospective landlord.

That’s the advice given by Alexandra Lethbridge in an interesting article published in the Estates Gazette (11 February 2012) (£).

In 2011 I wrote What Happens If Your Landlord Goes Bust? which, as well as looking at landlord insolvency generally, touched on some of the problems that can arise if your landlord is also itself a tenant (so you have a sublease).

Let’s assume for the purposes of this post that the head landlord doesn’t want to forfeit the head lease (which would in turn bring your sublease to an end); after all, it’s unlikely to want to be left with empty premises in the current market, especially in view of the burgeoning liability for empty rates.

If the head landlord wants to preserve the income stream from you, its subtenant, the best outcome for everyone would be for it to negotiate with your immediate landlord’s insolvency practitioners (most likely a liquidator or administrator) for a surrender of the head lease.

If the head lease is surrendered, you will automatically become the direct tenant of the head landlord on the continuing terms of your sublease; so effectively there’s no change, you just have a different, and hopefully more solvent, landlord.

Things can become more complicated if the head lease is not surrendered.

If your landlord has gone into liquidation, then the liquidator has the power to disclaim the head lease as “onerous property”.

Disclaimer is not the same as surrender.

If the head lease is disclaimed, your interest in the property is not brought to an end, but your sublease itself no longer governs the terms of your occupation (so effectively your sublease no longer exists).

What does that mean?

In practice, it means that the only way you can remain in the premises and avoid forfeiture is by paying the rent reserved by the head lease and complying with the covenants set out in the head lease, even if they are more onerous than the ones that were in your sublease.

But it doesn’t mean you become the tenant under the head lease.

This situation is hard to analyse as it amounts to an unusual hybrid.

In her article, Alexandra explains that the head lease remains in existence “to the extent necessary to support the subtenant’s occupation”; so rather than having a continuation of the sublease, you have instead a collection of assignable property rights in the disclaimed head lease.

You might be able to apply to the court for a vesting order vesting the head lease in you (the rules are quite complex).

That would result in a lease that was properly enforceable between the parties and would at least clarify the situation legally.

The downside is that the new lease would be on the same terms as the head lease, not your old sublease, which may not be what you want, especially if you only had a sublease of part of your landlord’s property.

The court unfortunately does not have the power to vary the head lease to make it compatible with your old sublease.

If you decide to do nothing, the head landlord can force the issue by asking you to choose whether you want to have the head lease vested in you, or to be excluded from all interest in the property (which would mean you would have to leave), although whether it takes such a heavy-handed approach will depend on its chances of finding another occupier willing to accept the more onerous terms.

If there are a number of subtenants of different parts of the property, the court has to “weigh up all the circumstances”.

What that might mean in practice is unclear.

That’s why it makes sense to try and do some financial due diligence on your landlord before you take on a sublease.

It won’t offer any long term guarantees, but it might alert you to an imminent problem.

[For more about subletting premises generally, you might like to see my post from 2011 -  How to Sublet Your Premises.] 

UPDATE 19/2/2013 - The above post is almost a year old, but still seems to be a popular one on this blog - a continuing and troubling sign of the times. If I come across any more recent examples of what can happen when an immediate landlord of a subtenant goes bust, I'll do a follow-up post. If anyone else meanwhile has any examples, I'd be delighted to hear from them.