When Your Tenant Goes Bust

More and more landlords are likely to be having to deal with the administrators appointed to manage the businesses of insolvent tenants.

A recent decision of the Court of Appeal will be unwelcome to landlords as it led the Court to conclude that mere loss of a ‘bargaining chip’ by the landlord was insufficient reason for it to be given permission to terminate a licence to occupy premises.

The case dealt with a corporate tenant that had a lease over a storage facility which was used to store many millions of pounds worth of goods. The lease had more then 20 years to run at a rent in excess of £1 million per year. The tenant went into administration and a buyer was found for the business under a ‘pre-pack’ arrangement. The administrators gave the buyers of the business a licence to occupy the business premises to enable the business to continue so the debts due to the company in administration could be collected. The licence fee was the same sum as the rent but was paid to the administrators each month in arrears rather than quarterly in advance. The administrators agreed to pass on the licence fees to the landlord in satisfaction of the rent. The landlord’s loss therefore was limited to the loss of interest on the rents received and the loss of security of future rents because the lease had been replaced by a licence.

The property was the main asset of the landlord, which wished to terminate the arrangement in order to put pressure on the buyer of the business to take a formal assignment of the lease. It needed the permission of the administrators or of the court to take legal proceedings against them (which is normal practice when a company is in administration). The decision to allow proceedings to be taken against a company in administration is at the discretion of the court and to obtain permission, the landlord had to persuade the Court that it would be inequitable for permission to take proceedings not to be granted. This is a matter of balancing the loss suffered by the landlord if permission to commence proceedings is refused with the loss suffered by the other creditors if permission is granted.

It was argued that had the short-term licence not been allowed to continue, the tenant company would have had to have been put into liquidation, with the result that the creditors’ interests generally would have been prejudiced and the landlord may not have received some of the rent due.

The Court rejected the landlord’s application and ruled that the landlord did not have an absolute legal entitlement to be paid contractual rent and interest as an administration expense.

This decision will not be welcome to landlords, who may well find their position undermined after a pre-pack administration has been completed. Where the landlord’s borrowings against their let property are substantial, the loss of a secure lease, even if replaced by a similar income on licence, could cause a breach of their borrowing covenants, which could have very unhappy ramifications. It has been reported that the landlord in this case has now followed its tenant into administration.