In our Law-Now of 4 April 2012 ( click here for link), we reported on the decision of the court in the case of Leisure (Norwich) II Limited v Luminar Lava Ignite Limited (in administration).  The detailed judgment has now been released, setting out the rationale for the decision and summarising the position on rents in administration generally.

The legal position on this issue is now:

  • Where rent is payable in advance (whether quarterly or monthly) and falls due for payment prior to the commencement of a liquidation or an administration then, whilst it ranks as an unsecured claim, it will not rank as a liquidation or administration expense (i.e. in priority to other creditors), even if the liquidator or administrator retains the property for the purposes of the liquidation or administration for any part of the quarter or month for which the advance payment was due.
  • Where rent becomes due during the period when an liquidator or administrator is retaining the property for the purposes of the liquidation or administration then the whole sum is payable as an expense, even if the liquidator or administrator gives permission to forfeit the lease or vacates the property before the end of the relevant quarter or month to which the advance payment relates.  In other words, a full quarter's rent is payable where rent is payable on a quarterly basis.  This was the decision in the Goldacre case.
  • Where rent is payable in arrears, because of the Apportionment Act the rent is deemed to be payable on a daily basis and will be payable from the date of the appointment of the liquidator or administrator for as long as the property is retained for the purposes of the liquidation or administration.  The judge in this case did not decide this issue in relation to the portion of rent payable in arrears but relating to the pre-liquidation or pre-administration period.

As a result, landlords will need to review their approvals in relation to new leases and monthly rent concessions (and if possible try to vary existing leases or rent concessions) in order to put themselves in the best position possible in the event of any tenant's insolvency.

Areas for consideration include:

  • amending leases to provide for monthly rents in advance;
  • amending leases to provide for rent to accrue on a daily basis with an "on-account" payment each quarter;
  • amending rent concession letters to ensure that monthly rent concessions amend the lease rent payment dates as an agreed variation;
  • acting swiftly, where appropriate, in seeking the consent of the administrators to forfeit the lease and take control of the property.  This is the only real remedy available (although not guaranteed) to landlords in relation to administrations or liquidations commencing shortly after a quarter day;
  • acting quickly, openly and fairly with the administrators in order to put a landlord in a better position, should an application to the court be required to permit forfeiture of the lease.

Comment

Unfortunately, this case will drive the timing of administration appointments to the early part of a quarter, following which administrators will be able to trade from properties without having to pay rent whilst looking for purchasers, or even after allowing purchasers into occupation, effectively rent-free, for the period up to the next quarter day.

Where rent is unpaid, landlords will need to seek to forfeit those leases where they consider they will be able to do better than the administrator or where they require possession of their property.

We will probably see more cases on this issue, particularly on forfeiture applications, and in due course probably an appeal to the Court of Appeal on the judgment in Luminar (and possibly Goldacre).

Better still, Parliament should review the fairness of the position in which the law now leaves both landlords and administrators, depending on the timing of the insolvency, and legislate for rent to be paid for the period during which the property is retained for the purposes of the administration or liquidation of the tenant. 

Use their disclaimer as follows:

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 19/04/2012.