Can a landlord expect the payment of rent as an 'administration expense' given the current ramifications of COVID-19?

The key question – How has an administrator used the property following its appointment?

A number of multi-site operators have entered administration since the outbreak of COVID–19 in the UK and the government-imposed lockdown requirements. Many of these tenants had ceased trading prior to administration and had taken steps to furlough employees.

Debenhams was placed into administration on 9 April 2020 and the majority of the staff had been furloughed prior to this date. The press has reported that the administration strategy is ‘light touch’ with the existing management continuing to deal with day-to-day matters - including negotiations with landlords in respect of rent compromises and variations to underlying leases.

Based on the above, a landlord could reasonably assume that the administrators were planning to either re-open sites, where agreement has been reached with a landlord, or sell the business as a going concern, with any rent concessions/variations agreed potentially making the underlying business attractive to a purchaser. In normal circumstances, when a business continues to trade, rent is deemed to be an administration expense.

Administration expenses (‘AE’) have priority over unsecured claims. It is usual for AE to be paid in full while unsecured creditors only benefit if there are surplus funds once repayment has been made in full to any secured and preferential creditors. In the majority of these cases, the returns are nominal. In light of these circumstances, it may be imperative for a landlord to seek payment of rent as an AE.

The ongoing lockdown has given rise to a significant number of commercial units being vacant and a number of multi-site operators experiencing difficulties pre-COVID-19 have entered administration with ‘light touch’ strategies. Landlords, together with any appointed administrators, must seriously consider whether, and how, rent demands should be made and rent discharged.

The courts have already provided clear guidance to both landlords and administrators in respect of the payment of rent following the Game case ruling (Court of Appeal decision). Under this ruling, it was deemed rent would be an AE if there was ongoing use of a premise that benefited the administration estate.

The courts ruled that rent accrues on a daily basis up until such time as beneficial occupation ceases. Rent will cease to be an AE if the property is vacated, the lease is assigned and/or an administrator offers a surrender with the keys being returned to the landlord. The agreement of a landlord is required to any proposed surrender of a lease by an administrator.

Therefore, if an administrator continues to use a commercial unit, the underlying rent should be discharged as an AE. A number of specific examples will include where:

• The tenant company remains in occupation;
• An administrator has agreed a licence to occupy with a third party without having sought the landlord’s consent;
• The underlying business continues to operate under the authority of an administrator to either:
  • Assist with the sale of the business as a going concern;
  • Sell its stock for a period of time; or
  • Wind down operations over a period of time

What changed with COVID-19?

As we have seen, COVID-19 has brought about significant changes to our day to day habits with disastrous effect on multi-site operators’ revenues across all UK business sectors. This had an enormous effect on the payment of the March quarter’s rent to landlords.

The government introduced specific legislation to protect commercial tenants from forfeiture and this has now been extended to serving statutory demands and winding up petitions together with exercising Commercial Rent Arrears Recovery (‘CRAR’) proceedings save where 90 days or more of rent are outstanding. CRAR is a statutory procedure which allows a landlord of a commercial premises to recover rent arrears by taking control of a tenant's goods and ultimately selling them.

Non-essential businesses have shuttered trading units with stock and/or equipment remaining on site pending re-opening strategies. In the event that these businesses were placed into administration rent may be deemed to be an AE under the following circumstances if the administrator:

• Intends to re-open the site for trading once the lockdown period ends;
• Is marketing the business for sale in a manner that would involve a buyer taking on the lease of the unit or otherwise trading the business from the existing premises. This will include any accelerated sales process being conducted by a firm of insolvency practitioners and their appointed agents;
• Has left furniture, equipment or stock in the unit which would prevent the re-letting of the unit of by the landlord;
• Furloughs employees, which should only be done if there is an explicit strategy that they will be ‘re-employed’ at a later date;
• Has granted access to the premises to a third party, whether under a written agreement (licence to occupy’) or under an informal arrangement; or
• Has not returned the keys to the landlord or its agent or has failed to respond to or not consented to the landlord peacefully re-entering the premises or been offered a surrender of the lease

Any of the above circumstances may well assist a landlord in arguing that the demand and payment of rent is an AE.

The current economic and lockdown environment is uncertain for landlords and its tenants regardless of the sector in which they operate. I have previously written about the need for a collaborative approach between a landlord and tenant. This will also need to include when dealing with any appointed administrator.

If a landlord is faced with the about scenario and requires assistance, please contact Kevin Ley who has acted for landlords in a significant number of insolvency matters.

Government legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate advice from their financial adviser before making financial decisions.

Source: Pillar Denton Ltd v GAME Retail Ltd (2014) - Judgment date 24 February 2014 References: LTL 24/2/2014 : [2015] Ch 87 : [2014] 3 WLR 901 : [2014] 3 All ER 519 : [2014] 2 All ER (Comm) 826 : [2014] BCC 165 : [2014] 2 BCLC 204 : [2014] 2 EGLR 9 : Times, April 16, 2014

https://www.gov.uk/government/news/new-measures-to-protect-uk-high-street-from-aggressive-rent-collection-and-closure

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DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.