Whilst the Scheme together with the rates reliefs, grant aid packages, tax deferment and increased bank credit availability announced by the Government are undoubtedly welcome, but what of the consequences, for both landlord and tenant, of "mothballing" a business in Scotland where it operates out of premises held under a commercial tenancy. In terms of the Coronavirus (Scotland) Act 2020, the right of the landlord to receive rents is not suspended, but the landlord's ability (on notice) to irritate (terminate) the lease for non-payment of rent etc is extended from 14 days to 14 weeks.

The other remedies of the landlord for non-payment of rent and non-monetary breaches are not affected so, in theory at least, actions can be raised for payment, statutory demands etc, albeit there are practical difficulties flowing from Sheriff Officers and the courts only accepting "urgent" instructions - and debt recovery/enforcement is not considered to be urgent. So failure to pay rent timeously would entitle the landlord to serve a 14 week irritancy notice and/or raise proceedings for payment as and when the current practical difficulties around service are eased.

However if the tenant is placed into administration, the tenant will benefit from the moratorium under the Insolvency Act which prevents the landlord irritating the lease and/or raising proceedings without the consent of the court or the administrators. Mr Justice Snowdon when giving directions to the Joint Administrators of Carluccio's opined that "furloughing" of employees was available to companies in administration provided there is a reasonable prospect of the employees resuming work. Therefore it is clear that a distressed business (with its employees on "furlough") such as Carluccio's could be "mothballed" for some weeks if not months. In such circumstances the rent continues to accrue on a daily basis during this period but what is not clear is if it accrues as a provable (but unsecured) liability of the company in administration or as an expense of the administration.

The Court of Appeal case of Jervis -v- Pillar Denton re: Games Station held, following the "salvage" principle in Lundy Granite, that rent (as well as service charge and insurance premiums) payable under a lease were held to be an expense of the administration to be calculated on a pro rata daily basis for the period that the relevant property was used beneficially for the purposes of the administration. This case, although an English Court of Appeal decision, has been followed, in practice, without demur, in Scotland. Whilst it is plain that during the Coronavirus pandemic, where businesses in administration have taken advantage of the Scheme, and such business premises are closed and by such definition not in use, they are nonetheless "mothballed" and effectively being retained for the purpose of the administration.

What then is the position of the rents payable during the period of the lockdown by a company in administration given the decision in Games Station? Should such rents be classed as an expense of the administration since the relevant premises are being retained for the benefit of the administration (namely a future sale designed to secure a better return for the creditors when the closure restrictions are lifted)? Or, given that the premises are not currently being used (or at least are not being used for retail purposes) is the position different? In Games Station it was held that the touchstone for the operation of the principle in Lundy Granite is the use of the property by the administrators. Mere retention is not use (indeed in the midst of the Coronavirus pandemic no such use is possible) so it would appear that there may be some doubt as to the position. Obviously there will be cases where the administrators are continuing to "use" the premises for the storage of stock and other items (others may take the view that it is preferable to remove stock etc to more secure locations). Will such decisions affect whether the ongoing rent falls to be treated as an expense of the administration?

One would have thought that where a tenant in administration fully intends at a later date to reopen from the premises, it would be harsh on a landlord to treat any period when there is no actual trading occurring as not giving rise to an expense claim. After all where an administrator advises a landlord that the premises are not being used for the purposes of the administration, it would be virtually unthinkable that such administrator would oppose an application for the moratorium prohibition on irritancy to be lifted. And yet, where the administrator intends to have the tenant later reopen the premises and resume trading, one would imagine that an administrator may very well seek to oppose such application. Surely an administrator cannot have his cake (protection for future use) and eat it (not have current rent treated as an expense).

One of the things that is unique to Scottish property insolvencies is the landlord's hypothec. The hypothec gives to a landlord a priority claim in the insolvency of its tenant. The priority is limited to the extent of arrears due at the time the tenant goes into insolvency. The priority claim is to be satisfied out of the proceeds of the realisation of the moveable property owned by the tenant and located at the leased premises at the point of the insolvency. Accordingly, in retail for example, a landlord's hypothec will attach to the proceeds of sale by an administrator of any stock at the premises where that stock is owned by the tenant. Importantly the hypothec ranks ahead of the floating charge and accordingly the timing of the insolvency of the tenant can impact greatly upon the outcome for the floating charge creditor.

The existence of the hypothec will also affect how an administrator should proceed with the running of the administration, with care having to be taken to ensure that the administrator is fully aware of the extent of realisations of the stock that was located at each Scottish leasehold premise upon his or her appointment. Where the administrator looks to achieve a sale of the entirety of the business and assets it will not be sufficient for the administrator to simply apportion a global price to stock and other moveable assets without dividing that up (at least in respect of the Scottish stores).

In those insolvencies where there is a Scottish leasehold component, the interplay between the hypothec and the issue of rent as an expense of the insolvency can be important. Where the rent payment day falls prior to the date of the appointment of the administrator, but the rent is unpaid, the landlord has the benefit of the hypothec (even where the administrator thereafter does not use the premises for the purposes of the administrator). In such circumstances, a landlord will not be able to claim the rent for the post-appointment period as an expense of the administration but would benefit from a Scottish hypothec claim. Accordingly a Scottish landlord may be in a better position than an English equivalent.

If you want to know more please get in touch with John Gallacher at john.gallacher@morton-fraser.com or 0141 303 7111