A landlord's bargaining position is dealt a blow by the Court of Appeal

In these tough economic times, a landlord of business premises may well find himself having to deal with the consequences of an administration of his tenant, writes Dominic Hopkins.

For the general body of creditors, the fact that the law prevents action being taken against a company in administration or against any of its property, without a Court order or the administrator's agreement, can be frustrating.

It can be particularly galling for the landlord, as he sees the administrator either occupying and using the premises for the purposes of the tenant's administration, or allowing a prospective purchaser into occupation under licence in breach of the terms of the lease, as the insolvency office holder seeks to recover value from the business for the benefit of the general body of creditors, at the landlord's expense.

In recent years, the landlord has had the reassurance that when asked by the landlord for permission to forfeit the lease or bring other enforcement action in such circumstances, the Court would not generally allow an administrator to secure a benefit for unsecured creditors at the expense of his property interests. Such action was described by the Court of Appeal in the case of Re Atlantic Computer Systems plc [1992] as an unacceptable basis on which to conduct an administration, effectively depriving the person with property rights of his bargaining position.

However, in a decision of the Court of Appeal at the end of last year (Re Innovate Logistics Limited (18.11.2008)), the Court indulged in some reverse pedalling. Although it held that the sums received by the administrator from an unlawful licencee should be paid over to the landlord, when balancing the loss relied on by the landlord in terms of its bargaining position against the potential loss to creditors "the result was obviously in favour of refusing permission" to enforce the landlord's rights.

In this way, the landlord was unable to place pressure on the purchaser of the business to take an assignment of the lease - to make him a lawful tenant rather than an unlawful licensee. He was also unable to recover the contractual rent and had to put up with the discounted licence payments agreed by the administrator with the occupant.

Whilst it is important to recognise that this case turned on its facts and the licence was temporary and relatively short, the Court appears to have dealt a blow to a landlord's ability to negotiate with an illegal occupant during an administration.

For more information please contact Dominic Hopkins on 01604 233 233 or
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