Like most things in life, timing is key when it comes to a company going into administration and the landlord’s claim to the rent due.
As we head back into ‘technical’ recession, there has been the inevitable increase in the number of businesses, particularly on the high street, hitting difficulty with their finances and being unable to pay their rent.
With the strong growth in internet sales, it seems inevitable that the high street will continue to suffer. The high street simply cannot compete with the infinitely lower overheads of the internet shops. The biggest overhead being the premises occupied by the high street retailer.
So, what happens to the rent due in the event of an insolvency?
In the event of a liquidation, this is straightforward. Whilst the retailer continues to be in occupation, any rent due prior to the liquidation will rank as an unsecured debt. Not great news for the landlord.
Any rent becoming due after a liquidation must be paid in advance of any other debts other than debts with fixed security. Better news for the landlord.
Until relatively recently it has been less than straightforward as far as administrations are concerned. Yes, the same applied for rent due prior to the commencement of administration i.e. it was classed as an unsecured debt.
But what about rent becoming due after administration has commenced?
Well, until the case of Goldacre, which has recently been supported by the case of Luminar, it was thought to be within the administrator’s discretion as to how much was paid for rent as an expense of the administration. This is not so anymore as a result of these cases. Today, any rent becoming due after the administration must be paid as an expense of the administration. The only item ranking above rent is fixed secured debts.
Even if rent is payable in advance for a quarter but the tenant only occupies the property for part of the quarter period, the rent must still be paid in full. Likewise if only part of the premises is occupied; if the lease relates to all the premises then all the rent must be paid.
So why is timing key?
Depending on when the insolvency proceedings commence will dictate whether the rent will be classed as an ‘expense’ or an ‘unsecured debt’. This is particularly relevant for administrations.
For some landlords, timing the administration so that the tenant can trade without having to pay rent could be quite significant. It could be the balance between the business being able to stay afloat and going into liquidation.
On the flip side, if landlords are not careful they could end with a tenant in their property but with no rent being paid. Canny administrators will time the administration such that it is commenced during a quarter period and then seek, where possible, for tenants to vacate the premises before the next quarter rent becomes due.
Goldacre and Luminar are only first instance decisions so this may not be the end of the story. Watch this space.
For further information on landlord and tenant matters, contact our Dispute Resolution team on 0161 475 7676.