Comet, explosive headlines and blame

There are a number of stories which caught my eye in respect of Comet going into administration.  They appeared in many papers and on-line.  I am linking to the Telegraph versions of two of them simply because there is no pay wall and they are easy to find (thanks to The Telegraph for being so helpful).  The stories are:

"Landlords hit out at Comet for failing to disclose finances"

and

"Comet gift vouchers suspended".

Of course the suspension of gift vouchers was turned into something completely more "offensive" by the telling of how Comet staff snubbed a buy suffering from cerebral palsy by refusing to accept a £500 gift voucher given by a charity to his mother to buy an Apple iPad for her son.  A stranger has now stepped in to buy the iPad instead. 
The fact is neither of these are real stories and what the newspapers are doing is using human nature and emotions to create a headline and a story.

Landlords did not get tricked

Let's look at the landlord story first.  The story highlights the amount of rent landlords will lose if they cannot re let sites currently let to Comet.  It then goes on to quote how landlords did not give concessions to Comet because management refused to be open book about their business plan and finances.  I don't get it.  Where is the story?  Comet sought concessions; Landlords asked for information; Comet refused; Landlord said "no".   If landlords had been fed misinformation and then agreed concessions now that would be a story.  If there was evidence that OpCapita had taken on the business with the intention of running it into the ground; now that would be a story.

Gift vouchers are just IOUs

Now consider the gift voucher stories.  First of all let's consider what a gift voucher is - it is simply an IOU.  You are a creditor of the business and an unsecured creditor at that.  When a company goes into administration all its unsecured creditors are likely to be wiped out or get very little return.  There is no separate arrangement for private individuals.
Therefore, when Comet went into administration the administrators could not simply ignore their duties as officers of the Court and tell Comet staff to continue to accept gift vouchers.  But let's not allow their legal duties get in the way of a good headline.  Evil administrators are easy targets especially when the other side is a poor child who is already suffering. 
My question is what on earth is a charity doing taking its donations and handing them over to a company in return for nothing better than an IOU?  That is the angle the newspapers should be looking at.  Is that a legitimate use of charitable donations?

It's not my fault

I suppose you could ask why do I care?  Well the main reason is that there are many similar examples where the media creates a story where there is none.  In doing so they ignore so many more important angles which may not be as attractive to the public.  And all this stems from or points to one major failing in society today - the need to blame someone else.  Everywhere we look, every time we see something not to our liking we have to find someone else to blame.  Now we have a list of targets and whenever something happens we look to find a story which allows us to place blame with someone on that list - the bankers, the politicians, the administrators, the private equity people, the media.  We also have a white list of people who tend to be untouchable and never to blame (a much shorter list) - the man on the street, the charities.

Perhaps this is the cause of so many of our problems that we face today.  Perhaps if rather than always looking to find someone to blame we stop and ask ourselves what could I have done differently?  How much of the fault of what has happened to me is because of me?  What could I do to improve the situation?  If everyone did that and changed how they acted as a result then we might find ourselves in a much better place a lot quicker.

In the case of the vouchers the charity could be reconsidering its arrangements (perhaps it is already).  Perhaps the mother would consider that she could have acted quicker when she got the voucher and immediately gone to Comet (of course I don't know when she got the voucher).  As for the stranger who stepped in - well he has done exactly what I suggested.  He didn't look for someone to blame he asked himself what he could do and he did it.  All we need is 50m more people with that kind of attitude in the UK and we might just get ourselves out of this mess.

UPDATE

This evening (6 Nov) the administrators announced that Comet would now accept gift cards but not corporate gift cards.  I have no idea why this decision has been made (or on what legal basis).  It is possible the administrators have secured funding for certain gift cards from the secured creditor which has allowed them to do this.  In any event clearly shows the impact of a particular story being run in the press.  Question is will the nice man who bought the iPad as for his money back?!?

BPF's "Taking the Profit" - extracting maximum value

The British Property Federation (BPF) is an organisation which represents Landlords.  Therefore it is an organisation which is important to me because it is important to my clients.  It recently launched its "Taking the Profit" campaign.  The target of that campaign is the use of administration particularly in the retail sector as a route to turning a distressed business into a more profitable one with the result that landlords either face shop closures or reduced rental income.  I made one prediction in my blog on New Year's Day and this fight was it.  Thank you to the BPF.
As frequent readers of my blog will know, I have much to say on the insolvency regimes and have blogged many times on the issues facing landlords arising out of administrations and other insolvency regimes as well as the impact of recent case law.  It is good to see the BPF seeking to tackle the issues head on and I cannot argue with the first points the BPF makes that the government has failed to act on tightening up pre-packs and making it easier to complain against Insolvency Practitioners.
However, whilst the BPF is to be praised for raising potential abuse of the insolvency regimes for the benefit of shareholders at the cost of creditors (and particularly landlord creditors) I think that in highlighting certain areas which are, perhaps, most headline grabbing some important areas for review have not received similar attention.  Some of the publicity around this campaign suggests that landlords are the unwitting, weak and undefended party in a war which is being waged against them by a united force of IPs and private investors.  Quite simply, in my experience, this is not the case.  Now it may be that my experience (which I admit is largely at the 'better' end of the retail property market (by better I mean primary and secondary) and involves dealing with the likes of KPMG, PWC, E&Y, BDO, Grant Thornton and others) largely misses out the activities at the tertiary end of the market and perhaps practices at that end are a little more shady.  However, my suspicion is that some landlord practices at that end of the market are not quite 'code compliant'.  Further by failing to identify the real reasons why the current regime unfairly prejudices landlords over and above other creditors risks losing the war.
The bad arguments
1.  It is largely pre-pack administrations where landlords are leant on to agree concessions
This is not the case. A pre-pack is when a deal is agreed and documented (but not signed) before the appointment of administrators.  Some of the administrations where landlords have been pressured to give rent concessions have been pre-packs.  However, most high profile administrations have not been pre-packs yet rent concessions have been sought by the new buyer.  Therefore, the BPF is, in fact and rightly, targeting administrations and not just pre-packs with this campaign.
2.  Administrations are effectively being used to transfer funds from pensioners who have invested in property funds and property companies to private investors buying businesses from administrators and then seeking rent concessions or threatening to close down
Using pensioners in any argument seems to be 'de rigueur' at present.  I think care needs to be exercised in utilising this argument.  Apart from anything else when it comes to unprofitable sites there are arguments that the landlord community carries some of the blame:

• in good times landlords happily agree high rents fully in the knowledge that if trading conditions deteriorate that rent may break the business
• the UK leasing model with relatively long lease lengths, upwards only reviews and full repairing and insuring provisions, whilst providing secure income in the sense of no costs, means that rising service charges add to the burden on tenants increasing the risk of insolvency
• the use of quarterly rents creates cash flow issues for tenants and also creates greater risk for landlords in the light of recent case law
• whilst some landlords have been sympathetic to struggling tenants many others have taken an aggressive route refusing to consider any concessions accusing the tenants of trying to make them pay for a bad business

3.  Landlords are being forced to agree rent reductions
No one is being forced to do anything.  Landlords may not like the threatening manner in which some agents and/or buyers act; saying that unless the rent is reduced a unit will be closed down.  But, at the end of the day, the landlord can call their bluff and refuse to agree the concession.  Landlords are not above being threatening either.  I had one case where a landlord (not institutional) unlawfully re-entered a property through the use of, what can only be described as, thugs because he did not like the possibility of a CVA.  That is far more serious than aggressive posturing in a negotiation.
Landlords are big boys and just as able to use an aggressive negotiating stance.  As advised in a recent blog landlords have quite a good negotiating position albeit limited by the commercial realities affecting each individual property.  In reality landlords are often paying for the fact that they own a property which is not in a prime location and which can no longer command rents at the level originally agreed.  If they could get a better rent then they should refuse the rent concession and get possession.  That is called risk and, without wishing to teach grandmothers how to suck eggs, that risk should have been reflected in the yield when the property was acquired.

The other side of the coin

The BPF is absolutely right to put the issue of administrations on the public agenda.  I think it is important to recognise that there are issues with the system which impact (possibly unfairly) on landlords which should be at the forefront of the campaign:

• the current legal position on payment of rents (especially in the light of the decision in the recent case of the Leisure (Norwich) II Ltd & Others -v- Luminar Lava Ignite Ltd (in administration) & others [2012] EWHC 951 (Ch) gives freedom to tenants not to pay rent and for administrators to trade rent free until the next quarter day.  The Game administration is the biggest example of this.  This flies in the face of the "pay for what you use" approach to insolvency situations and is unique to leases due to a clash between real estate law and insolvency law.
• the moratorium preventing forfeiture without consent - with all other contracts the provider can effectively terminate the contract on insolvency and there is nothing to stop them from doing it.  However termination of the lease can only occur by use of forfeiture which is a form of proceedings.  Due to the moratorium such action requires court approval (or administrator consent).  This exposes the landlord to greater potential future loss than other creditors who, whilst they might lose out on arrears, are not exposed to further losses unless they choose to contract with the administrators or the new business

In my view these are the mischiefs which the BPF should be seeking to undo.  Whilst anti-private equity and pro-pensioner arguments attract good press the reality is that they do not properly encapsulate the issues with a system which, whilst not completely broken, is not working in perfect harmony either.

All that glitters is not Goldacre

In January 2010 I blogged on a very recent decision called Goldacre (Offices) Limited -v- Nortel Networks UK Limited (in administration) [2009] EWHC 3389 (Ch.).  In November of the same year I picked up on a Scottish case (Cheshire West and Chester Borough Council -v- Springfield Retail Limited (in administration)) in which the decision in Goldacre was applied and certain parts clarified.
Landlords were very happy with Goldacre.  The principle meant that administrators could no longer calculate rent on a daily basis but rather had to pay for the full quarter.  However, as I highlighted the decision in Goldacre did create a level of uncertainty.  Most importantly it left open the possibility that where an administrator is appointed after a rent payment date and then rent has not been paid that the outstanding rent will be an unsecured claim.
A question answered
That question is unclear no longer.  In the High Court decision handed down by His Honour Judge Pelling QC (oral judgment only) it was decided that where a company goes into administration any unpaid rent which fell due before the appointment of the administrators will be an unsecured claim against the company and not an administration expense.
Whereas after Goldacre landlords were jumping for joy many are now holding their head in their hands and here is why.  On 26 March 2012 that behemoth of retailers, Game, entered into administration.  Whilst I do not know for certain I would countenance that any lease where the rent fell due on 25 March (the March Quarter Day) did not get the rent paid prior to the administration.  Those landlords now have no chance of receiving any payment for the quarter from 25 March to 23 June whilst at the same time they cannot recover possession of the property due to the moratorium.  Going to court is not attractive as it will now require the Court of Appeal to rule on the matter which means losing at first instance just for the pleasure of some time in front of our learned Law Lords.
A bit of history
In truth the whole episode is a rather sorry tale of a silly issue resulting in unhelpful law.  Goldacre was not really about when the liability to pay rent arose.  Rather it was about whether administrators should have to pay the full rent when they were only utilising a part of the let property.  Up until Goldacre both administrators and landlords operated on the principle that you pay for what you use (i.e. for each day you use the premises the administrators must pay).  This is a recognised principle in insolvency law.
The problem is that this principle crashes head-on with the law in relation to rent that rent payable in advance cannot be apportioned (rent in arrears can thanks to the Apportionment Act 1870 - interestingly a piece of legislation enacted for the benefit of landlords who previously could not recover rent arrears having forfeited a lease where rent was payable in arrears).
In effect the court has decided that the non-apportionment principle cannot be overriden by the pay-what-you-use principle and so we land up with a position which neither landlord nor administrator actually want.
Landlords lose out on rent for the quarter in which the administrators are appointed.  Administrators risk having to pay for a full quarter whilst only utilising the property for a small part of it.
So who has the upper hand now?
Almost certainly administrators acting for tenants do.  There is little doubt that where a company is on quarterly rents payable in advance on the usual quarter days that it can provide the administrators with significant breathing space if any appointment is done immediately after a quarter day having not paid that quarter's rent.  The administrators can trade rent free for a quarter.  There is little doubt that the two decisions effectively invite companies to do this and, frankly, they would be silly not to avail of the opportunity.
However, in a lot of cases struggling companies approach their landlords much earlier when in difficulty to seek either rent concessions or changes to rent payment dates.  Many landlords will simply reject such requests or agree to move to, say, monthly rents or staggered payment arrangements to assist with cash flow.  However, landlords would be well advised to use any such approaches as an opportunity to change the balance in their favour.  The law is all about when liability to pay arises and if you can change when the liability arises you can avoid suffering unnecessarily when the tenant ultimately goes into administration.