Last year saw a spate of high profile retailers entering administration. In 2012 Blacks, Peacocks, Clinton Cards, La Senza, Game, JJB Sports, Comet and Past Times all went into administration. That trend has continued into the first quarter of 2013 with Blockbuster, Jessops and HMV being the highest profile examples.
For landlords covenant strength is now more important than ever. Landlords need to be particularly vigilant just after the quarter date as, for reasons explained in this article, that is when tenants are now tending to go into administration.
Administrator’s Strategy
When a tenant goes into administration the administrator will usually separate out the profitable stores in the portfolio from the non-profitable stores. The administrator will write to the landlords of the non-profitable stores and offer a surrender of the relevant lease.
The administrator will wish to continue to use the profitable stores but whether the administrator will pay rent as an expense of the administration for that use is dealt with below.
Pre-Pack
Often, the administrator will sell the assets of the company in administration to a newly incorporated company. The administrator will then grant a licence to occupy to that newly incorporated company and will seek retrospective consent from the landlord to assign the relevant leases to that company.
The terms on which a landlord can or cannot refuse consent to assign are set out in the lease for each property. Often, a landlord can reasonably withhold consent to an assignment to a newly incorporated company on the grounds of financial standing.
Effect of Administration
Once a Notice of Intention to appoint an administrator has been filed at court, the company is protected by a moratorium which prevents any action being taken by its creditors. In the context of a lease the moratorium prevents the landlord from:
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distraining on rent (instructing a bailiff to seize goods); or
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forfeiting the lease (i.e. terminating the lease by proceedings or peaceable re-entry).
Forfeiture is therefore only available against a tenant in administration where the landlord either obtains consent from the administrator or permission from the court.
Forfeiture
If a landlord makes an application for permission to forfeit, the court will follow the guidelines in Atlantic Computer Systems Plc [1992] Ch 505 (CA). It is essentially a two fold test:
1. Purpose of Administration: permission should normally be given if forfeiture is unlikely to impede the achievement of the purpose of the administration.
Therefore, if there is no prejudice to the administration then the balancing exercise (part 2 of the test) does not apply. If however there can be shown to be some prejudice, then the balancing exercise will be carried out.
In the pre-pack situation where the administrator has let a third party into occupation under a licence to occupy, forfeiture will not impede the administration unless there is (for example) some form of deferred consideration. In the case of no prejudice, the court will grant permission for forfeiture.
2. Balancing Exercise: if there may be some prejudice to the administration by forfeiture then the court must balance the interests of the landlord and the interests of the other creditors of the company.
In conducting the balancing exercise, great importance is normally given to the proprietary interests of the landlord. It will normally be a sufficient ground for the grant of permission if significant loss would be caused to the landlord by a refusal.
Payment of Rent
Most important to landlords is whether they will be paid their rent. This has been the subject of case law driven movement in the last few years.
Goldacre (Offices) Limited v Nortel Networks UK Limited (in administration) [2010] Ch.45 states basically that if an administrator is in the property on the quarter day then he isliable for all rent on the quarter day for that entire quarter as an expense ofadministration.
As an extension to the Goldacre logic, in Leisure (Norwich) II Limited v. Luminar Lava Ignite Limited [2012] EWHC 951 (Ch.) it was held that:-
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where rents fell due prior to the start of the administration, those arrears are not payable as an expense of the administration; but
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where rents fall during the administration and the administrator is using the property, the whole quarter’s rent is due as an expense of the administration.
Lazari GP v Game (UK) Retail
This case is a good example of the above principles in practice.
Game went into administration on 26 March 2012, being the day after the quarter date. Lazari were Game’s landlord at their flagship property on Oxford Street and they instructed Charles Russell LLP. PwC, the administrators of Game, stated that as a result of Goldacre and Luminar they were not prepared to pay rent for the March quarter because they were not in occupation on the March quarter day.
PwC also granted a licence to occupy to a newly incorporated company without landlord’s consent.
Following the guidance in Atlantic Computers, the court held that there was no evidence of any prejudice to the administration in allowing forfeiture, because the party who would be affected was the party in occupation and that was no longer the company in administration. Therefore it did not even need to consider the balancing exercise.
As a result of Game’s administration, landlords have joined forces with the administrator of Game to seek clarification as to whether rent should be paid as an expense of the administration if the stores are still occupied. The outcome is due in the next few months.
Summary
Recent caselaw has complicated what used to be quite a straightforward area of law. Administrators used to have to “pay as you go” and pay rent as an expense for the time of their use. Luminar has not only stopped this but has also seen moratoriums used for a purpose they were not intended, in denying forfeiture for the benefit of third parties.
The sooner the courts can distinguish Luminar therefore, and get back to the common sense position that previously prevailed, whereby administrators pay for their use, the better for all concerned.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
