UK: Administrators Get To Use The Property Rent Free!

Last Updated: 14 June 2012
Article by Neil Emerson and David Vaughan

Leisure Norwich (2) Ltd & Others v Luminar Lava Ignite Limited & Others - [2012] EWHC 951(Ch). Incurring liabilities to third parties is often necessary in order to carry out an effective administration of an insolvent company.

The Insolvency Act 1986 requires administrators to discharge liabilities of this kind (known as 'expenses' of the administration) in priority to other liabilities of the company, including the company's unsecured creditors. In order for a liability to rank as an expense of an administration it must  fall within one of a number of prescribed categories.

In the Goldacre case, which was decided in 2009, the High Court ruled that, where  an administrator continued to trade for the benefit of the company's creditors from part of premises on a rent payment date, then the whole of the rent for that rent period was payable as an expense of the administration. This would apply even if the administrators subsequently vacated the premises before the next rent payment date. The Goldacre decision was welcomed by landlords.

However, there have recently been various high-profile retail administrations which commenced immediately after a rent quarter day. In many cases, administrators have continued trading from premises pending a sale of the business or to sell off remaining stock.

In the recent case of Leisure Norwich (2) Ltd (Leisure) & Others v Luminar Lava Ignite Limited (Luminar) & Others, the High Court dealt with the uncertainty as to whether landlords can recover rent arrears totalling £220,000 in those  circumstances as an expense of the administration in priority to other creditors.

The question in the Luminar case was whether rent that fell due before the company entered administration could rank as an expense if the company  occupied premises in the period up to which the rent had fallen due.

Facts

Luminar, which was Britain's biggest nightclub operator, traded from a number of premises. It became insolvent and went into administration on 26 October 2011. All the leases held by Luminar provided that the rent was payable quarterly in advance.  Luminar went into administration after the September quarter day, without paying rent for that quarter. After going into administration, Luminar continued to occupy and trade from the leasehold premises, while the administrators marketed its business and assets for sale.

Leisure (Luminar's landlord) applied to the Court alleging that the conduct  of Luminar's administrators was unfairly prejudicial to Leisure's interest. Leisure was unhappy that Luminar remained in occupation of the premises without paying any rent.

Leisure applied to the Court for an order requiring the administrators of Luminar to pay all rents that were outstanding under the leases as an expense of the administration.

Judgment

Judge Pelling QC rejected Leisure's application for payment of rent and held that:

  • where rent falls due prior to the commencement of the administration, those  existing arrears are not payable as an expense of the administration;
  • instead the landlord  can prove for the unpaid rent as an unsecured creditor. This is the case even where the administrator/liquidator uses the property for the purpose of the administration during the period for which the advance payment was payable;
  • where rent falls due during a period when the administrator uses the property for the purpose of the administration, the whole of the sum due is payable as an expense of the administration. It makes no difference whether the administrator uses the property for the whole period for which the payment in advance is due or only part of it.

In other words, the Court held that expenses of the insolvency process were obligations incurred after the commencement of an insolvency process. The Court held that the principles of Goldacre only applied to obligations that fell due in the course of the insolvency process. There was no scope for liability that had fallen due for payment before the start of the insolvency process to become an expense.

As Luminar went into administration after the September quarter day (without paying rent for that quarter) the rent could not be held as an expense of the administration.

Luminar's administrators were therefore not liable to pay that quarter's rent.

Comment

Where a lease provides that a company must pay rent quarterly in advance,  the administrators of that company can enjoy the remainder of the quarter in rent free occupation of the premises if they are appointed after a quarter day. It is worth noting that where rent is payable in arrear, the administrators will be liable for the rent that has fallen due while the premises were being retained for trading  purposes.

For landlords this decision is bad news. In order to limit their exposure, landlords may now be more willing to move to monthly rents.  Reducing the period between rent payment dates will limit the period that administrators can trade without paying rent as an 'expense' of the administration.

Insolvency practitioners will be delighted that the Luminar decision will allow them to continue to operate a company rent free if the administration takes effect shortly after a quarter day.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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