Goldacre v Nortel Decision

In a recent English case it was held that if leased premises are being occupied by an administrator for the benefit of creditors, rent should be treated as an “expense of the administration”. The effect of this decision is to move a landlord’s claim for rent forward in the queue for payment so that it has a high level of priority in a tenant’s insolvency. This has important practical consequences for landlords, and the decision has recently been upheld as generally applying in Scotland.

Background to petition by Cheshire West and Chester Borough Council

A Scottish company tenant of premises in Worcester went into administration in March 2008. The administrators paid the rent for a short while and then sold the business. As part of the sale agreement they granted the purchaser a licence to occupy the premises. They did not obtain landlord’s consent as required by the lease. The intention was that the licensee would become the tenant by virtue of an assignment from the administrators once landlord’s consent was obtained.

Information pertaining to the proposed assignee was never provided to the landlord and the assignment never finalised. The licensee in occupation did not make any payments of rent or other sums to the landlord and the administrators left the landlord to try to recover this rent etc, which they could not do in terms of the licence granted by the administrators.

The landlord asked the Court to confirm that the administrators were bound to pay them unpaid rent, as an expense of the administration, for the period whilst the licensee was in occupation.

The Decision

The Court was influenced by several English decisions and the terms of the Scottish Insolvency Rules and held that rent should be treated as an expense of the administration, where administrators either use leased premises themselves or allow another party to use them.

The decision is good news for landlords as it means that rent falling due whilst premises are occupied for the benefit of creditors of the tenant will take priority over other claims, e.g. preferential creditors. Landlords are now therefore in a much stronger position to recover rent when a tenant goes into administration.

A wake-up call for administrators?

Whilst this decision will provide comfort to landlords, it will be less well received by insolvency practitioners. The Court was highly critical of the administrators’ handling of this situation and the fact that they ignored the landlord’s legitimate interests.

Administrators may have to reconsider their strategy for the administration of an insolvent company where leased premises are involved. They will have to carefully consider the terms on which they grant licences to occupy. Going forward it is likely that administrators in similar situations will try to:

For guidance regarding Landlord’s strategies in administrationGuidance please see our page.