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.

Peacocks sold: Seduction again?

Those familiar with my blog will remember my relatively recent blog entitled Blacks and La Senza: Agression v Seduction.  Today we are met with the news that Peacocks has finally been sold out of administratio to Edinburgh Woollen Mill.  This is good news, especially for the 6,000 people whose jobs have been saved and the 338 landlords whose stores will remain open.  It is less positive for the 3100 people who will lose their jobs and the 224 stores that have ceased trading with immediate effect.

A quick note to landlords of those stores - the oft-quoted decision in Goldacre may not assist you in getting your rent paid up to the next rent payment date.  This is because the decision left it woefully unclear what the position was where a company went into administration after a rent payment date - is the rent or any part of it an expense of the administration or can the company in administration effectively trade rent free?
But do not despair completely for it appears that Edinburgh Woollen Mill has adopted the "seductive" approach to its acquisition vis-a-vis landlords.  Philip Day, chairman and chief executive of the Edinburgh Woollen Mill Group, based in Langholm in Scotland, is quoted as saying that he hoped there would be scope to save more jobs and stores from those being forced to close due to performance issues and overhead pressures.
This is a clear statement of intent that once they have had the chance to review all the numbers they will identify further sites they wish to re-open and dangle in front of landlords the carrot of some rent.
Does this mean that seductive approach is now preferred over the aggressive approach or is this just a hangover from Valentine's day?  No doubt there will be a few more insolvencies in 2012 that will reveal more.

Blacks and La Senza: Aggression vs Seduction?

Yesterday saw the first of what will most likely be a wave of pre-pack administrations of high street names when both Blacks Leisure and La Senza went into administration and immediately thereafter their businesses (or at least the profitable parts of it) were sold to willing buyers.  Pre-pack administrations have come in for a lot of criticism on the basis that they often, if not always, return no value to unsecured creditors or shareholders.  However, they have their merits and, in a lot of cases, genuinely achieve the best result possible overall for stakeholders.  Therefore, much to the dismay of some readers, I am not about to launch into vitriolic criticism of the use of pre-packs to save jobs and businesses with unsecureds being left high and dry.
There is, however, one common thread of both the La Senza and Blacks pre-packs which are worth highlighting and, as a landlord, preparing for: lease renegotiations.  In the case of Blacks, the official press release from JD Sports Fashions stated:

"Following the elimination of any underperforming stores and other cost reduction initiatives we believe the business can be run successfully as independent fascias within the Group."

With La Senza, less than half the retail sites leased by the group were bought out of administration with the majority of sites closing down so, it is likely, only the performing stores were part of the original deal.  However bearing in mind the official press release which stated:

"Today’s announcement represents a first step in a long-term commitment to developing the La Senza UK business, which we believe has great potential."

it seems likely that 'new' sites are on the cards.
My prediction is that in both cases landlords will be approached by the new owners to renegotiate lease terms.  What we have is a difference in approach from the new owners; one is seeking to pressure landlords whilst the other is seeking to seduce them.
In the case of Blacks the new owners have probably taken a licence to occupy all the sites and will now meet with the landlords of "underperforming sites" to seek to renegotiate the leases.  This will be the stick or 'Aggression' based approach; if the landlord does not agree the terms the site will be closed and the landlord left with the void costs, which would include empty rates liability, service charge irrecoverability and an unoccupied site which quickly becomes unattractive.
In the case of La Senza whilst landlords of transferring sites might be approached, bearing in mind the number of up front closures, I anticipate that the new owners will approach landlords of some of the closed sites and propose new terms under which they would be willing to re-open.  This is more of a 'carrot' or 'Seduction' based approach offering to relieve landlords of the void exposure.
As a landlord it is important that you are aware of what your negotiating position is in respect of any approaches.  It is worth keeping the following in mind (and get detailed legal advice in respect of them where relevant):

• an administrator has no right to disclaim or unilaterally surrender a lease or otherwise bring a lease to an end earlier than a solvent tenant (only a liquidator has that power).  Therefore rates liability in particular should not fall on a landlord simply because of the tenant going into administration although ultimately liquidation is likely).
• if the property is still being used (and this is particularly important in the case of Blacks) then the lease liabilities arising are likely to be an expense of the administration.
• due to the decision in Goldacre expect there to be significant pressure to get deals done before rent payment dates as administrators in particular will wish to ensure that they can avoid any risk of the next period's rent being payable as an expense in whole.  My view is that a challenge to Goldacre or an attempt to extend it is very likely this year.
• pre-conditions or requirements set out in the lease as things which the landlord can rely on in terms of refusing consent to an assignment apply to an assignment by a company in administration just as much as they do in non-insolvency positions.  Obviously a balance is to be achieved but if you really do not want to consent to an assignment or the proposed terms don't think you will have no choice in the matter.
• the courts will not be quick to grant consent to forfeiture.  In our experience to date courts have given administrators quite a long time to try and assign a lease so even where the proposed assignee cannot meet lease pre-conditions do not assume the courts will be on your side.

La Senza and Blacks might be the first major retailers of 2012 to go to the wall but, if the reports are to be believed, they certainly will not be the last.  Whether buyers of such portfolios use might or seduction methods to seek new lease terms we can only speculate but what La Senza and Blacks show is both approaches are being considered and pursued.  Either way, make sure you use protection!

McGoldacre: A Scottish lilt on rent and admin expenses

In January 2010 I posted a blog on the decision in Goldacre (Offices) Limited -v- Nortel Networks UK Limited (in administration) in which the High Court ruled that where an administrator uses a leasehold property for the benefit of the administration on a rent payment day then the whole quarter's rent is payable as an expense of the administration.
Now a court in Scotland has produced a carbon copy in slightly different circumstances. In its decision in Cheshire West and Chester Borough Council -v- Springfield Retail Limited (in administration) the in the Outer House of the Court of Session Lord Menzies held that the fact that the person in actual occupation was neither the administrator nor the company in administration but rather a licensee of the company in administration, was not relevant and that since the licensee had been let into occupation by the administrator as part of a sale of the business then the rent was due as an expense.
Frankly the decision does not come as a surprise. It would be strange if the court had held that administrators could allow a third party into occupation of a leasehold property and that in doing so they would not be liable for the rent as an expense. To do so would create a significant arbitrage opportunity whereby third party licensees could run businesses out of leasehold property of companies in administration where the landlord had no contractual right to rent from the licensee and only an unsecured claim against an insolvent company.
Therefore, in reality the case tells us nothing new and does not answer a number of fundamental questions which the decision in Goldacre raise including:

1. If the administrator goes into occupation the day after a rent payment day will none of that period's rent be payable as an expense?
2. Are dilapidations arising during the period of administration an expense of the administration?
3. If there is a sub-tenant in occupation who carries the credit risk of that sub-tenant defaulting? Does it affect the analysis if the company in administration does not continue to use the remainder of the premises?

Rent is an administration expense - but at what cost?

A recent decision in the High Court (Goldacre (Offices) Limited -v- Nortel Networks UK Limited (in administration) [2009] EWHC 3389 (Ch.)) has confirmed that where an administrator makes use of a leasehold property the rent reserved by that lease will be an administration expense. This is in accordance with most practitioners' prior views.

However, the case did decide some other related points which are, in some ways, surprising as follows:

1. the amount of rent which becomes an expense of the administration does not relate to the area occupied. Use of a small part of the premises demised will make the whole rent reserved an expense of the administration;


2. if the administrator is using the premises on the rent payment date then the whole period's (e.g. quarter's) rent will be payable as an administration expense even if the administrators' use ceases during the relevant period.

These two points could have interesting implications. The corollary of (1) might be that where the premises are part sub-let and the administrators continue to use the other part then it may be that the administrators are exposed to the credit risk of the sub-tenant default. The corollary of (b) might be that where the administrator is not using the premises on the rent payment date then there is no liability for the rent as an expense even if the premises are used for the remainder of the relevant period.

Neither of the above points were directly addressed in the judgment.

It should be noted that the fact that it is now confirmed that rent will be an expense of the administration if the administrators are using the premises does not mean that the administrators have to pay it on the due date and in full. This is still dependent on there being sufficient realisable assets out of which the rent can be paid. This was expressly confirmed in the judgement.

So whilst the case confirms a generally held belief it has muddied the waters for both landlords and administrators in some regards and altered the balance of power slightly but with the administrators arguably still holding the upperhand through the benefit of the moratorium.