Goldacre v Nortel - welcome clarity on when administrators must pay rent for use of premises

The recent High Court case of Goldacre v Nortel has helped to clarify the thorny issue of when a landlord can require the administrators of a company to pay rent for leasehold premises they use for the benefit of the administration.

The facts

Goldacre (Offices) Ltd was the landlord under two long leases.  Nortel Networks UK Ltd was the tenant.  Nortel went into administration and, during the administration, the administrators used a small part of the premises let under the leases.  Other parts of the premises continued to be occupied by sub-tenants, who were paying their rent direct to Goldacre.

Goldacre sought payment of the rent due under the leases in full and an order that the rent should be paid as an expense of the administration because the premises were being used for the beneficial outcome of the administration.  The administrators resisted this and argued that rent only had to be paid as an expense if the administrators exercised their discretion to do so, or if the court ordered them to do so.  The administrators also argued that if they did have to pay for the continued occupation of the premises, they should only have to pay a proportionate rent for: (i) the amount of space they were using, and not the full rent; and (ii) the time that they actually occupied the premises. 

The court’s decision

Finding in favour of Goldacre, the High Court ordered the administrators to pay the rent in full as an administration expense.  In doing so, the court has given much needed clarity on (i) when administrators have to pay rent; and (ii) whether they can be forced to pay rent as an administration expense.  The legal reasoning behind the court’s decision is as follows:

• Following the decision in Toshoku Finance UK Plc (2002) it has been clear for some time that, in liquidations, liquidators have to pay rent as a liquidation expense under Insolvency Rule 4.218(1)(a) where the premises are used or retained for the benefit of the liquidation.  The equivalent insolvency rule for administrations, which is worded similarly but not identically, is Rule 2.67(1)(a). 
• The decision in Exeter City Council v Bairstow (2007) set out a regime for the payment of expenses which was mandatory for administrators as well as liquidators.  In Goldacre it was the court’s view that if rent falling due under a lease falls within these rules it would be mandatory for the administrators to pay that rent as an expense and administrators would enjoy no discretion to do otherwise.
• Even if rent does not qualify as an expense for any reason, it is likely to be caught as a “necessary disbursement” under Insolvency Rule 2.67(1)(f) and would therefore have to be paid by the administrators on that alternative basis. 
• The court followed the principle in Powdrill v Watson (1995), a case concerning a liquidation, in which the House of Lords held that a liquidator who chose to hold on to and use leasehold premises could only do so on the terms and conditions set out in the lease.  The court therefore had no discretion to interfere with the amount to be paid by the administrators, even though they were not occupying all of the premises.  Their right to occupy stemmed from the leases and so the rent due under those leases had to be paid.
• As the rent was payable quarterly in advance under Nortel’s leases, each quarter’s rent was payable in full as an administration expense on the due date under the leases.  It also had to be paid in advance for the whole quarter, even if there was a prospect or likelihood that the administrators would vacate the premises at some point during the quarter.  The administrators had no discretion or entitlement to apportion the rent and only pay for the part of the quarter when they would be in occupation.

What does this mean for landlords and tenants/administrators?

For landlords of companies in administration, the Goldacre decision is welcome because:

• It clarifies the issues raised by the Court of Appeal decision in Sunberry Properties Ltd v Innovate Logistics (2008) which, albeit that it proceeded on the basis of a concession, stated that rent was not automatically an administration expense and that a court had a wide discretion over whether to order payment.
• Administrators will now be much more readily aware of their obligation to pay rent for premises which the administrators either need to keep using (e.g. because they are integral to the tenant’s business) or want to keep hold of (e.g. because they may be so attractive as to attract a premium on assignment). 
• Not only that, such rent will be paid as administration “expenses”.  This means that such liabilities will need to be paid by the administrators ahead of other administration expenses (including the administrators’ own remuneration) and all other creditors other than those holding a fixed charge.  
• In future, administrators will not be able to resist claims by landlords for the payment of rent for premises they are occupying and using and landlords should therefore contact administrators shortly after their appointment to seek confirmation of this.   

Conversely, for administrators the decision means that:

• A clear obligation is now imposed on administrators to pay rent whilst property is used during the currency of an administration. 
• Administrators will need to plan ahead so that early decisions are taken when they take the appointment about which of a tenant’s premises are essential or desirable to keep and which could afford to be lost.  It will assist administrators for them to be fully aware of when rents fall due under all leases owned by the tenant (especially those with high rents or with large property portfolios), so that if a decision is taken to vacate then that is done before the next rent quarter’s rent falls due. 
• Administrators will also need to understand that even the use of a small part of premises occupied under a lease will expose them to a liability to pay the full rent under that lease.  In circumstances where a number of different premises are leased, the Goldacre decision increases the need to operate from fewer premises where this is possible.  
• In relation to “borderline” properties, where it is a close call between staying in occupation or vacating, it may be wise to discuss the possibility of agreeing a partial surrender or a rent reduction with the landlord.  In a difficult economic climate such as this, the landlord may be surprisingly receptive if it is preferable for him to have the administrators in occupation paying a reduced rent, rather than see the administrators vacate leaving him with nothing more than an unsecured claim in the administration. 
• Administrators should now give careful thought to whether the tenant has any claim of its own against the landlord.  If so, it may be possible to rely on that claim to avoid paying some or all of the rent by way of a “set off” (any rent due is a company expense and not personal to the administrator).  However, this is a complex area and administrators would be wise to take legal advice on this issue in any appropriate case.