If administrators use leased property for the benefit of the administration, rent is payable to the landlord for the period of occupation, as an expense of the administration.

In London Bridge Entertainment, the court considered whether the administrators were obliged to top up a rent deposit where the landlord had taken monies from the rent deposit and applied the money against rent that fell due post administration and which would otherwise have been paid as an expense.

In part 3 of a series of blogs considering the position of landlords on insolvency we consider what are the consequences of taking money from a rent deposit if the tenant company is in administration?

The facts of the London Bridge case are straightforward.

The tenant company went into administration on 29 November. Rent of c£500,000 fell due on 1 October and the landlord withdrew the unpaid rent on or around 9 October. The landlord also served notice on the company requiring the rent deposit to be replenished.

The landlord asked for the administrators consent to forfeit. Consent was originally refused because the administrators sought to assign the lease but when an assignee could not be found, the administrators agreed to forfeit the lease, which was accordingly forfeited on 22 December.

It was agreed between the parties that the administrators had used the property for the purpose of the administration and that rent for the period of occupation was therefore payable as an expense – except that there was no rent due because the landlord had been paid from monies already withdrawn from the rent deposit. The landlord sought an order requiring the administrators to pay the rent of c£500,000 as an expense of the administration.

After considering the expenses rule, the Court determined that it did not extend to topping up the rent deposit

Had the landlord not utilised the rent deposit, any rent due for the period post administration would have been paid as an expense and the landlord could have used monies held in the rent deposit against other liabilities falling due under the lease, such as dilapidations.

This might seem unfair but the rationale for this finding is based on the application of the Lundy Granite principle.

In simple terms, rent is payable as an expense when administrators choose to use leased property for the benefit of the administration. In those circumstances, it is fair that rent is paid as an expense because the administration benefits as a consequence.

However, there is no obligation to “top up” a rent deposit simply because the liability to reimburse the deposit arises whilst the administrators are in occupation of the property. In this case, it was the landlord’s decision to withdraw the money and then seek reimbursement.

Unlike rent, where the administrators are paying for what they use, there is no benefit to the administration of “topping up” the deposit. It only benefits the landlord in so far as providing additional security out of which other non-expenses claims, such as dilapidations, could be paid.

The findings provide a salutary warning to landlords (and their advisors) not to jump the gun.

Further reading:

To read parts 1 and 2 of this series of blogs click on the links below:

Does a company voluntary arrangement permanently vary the terms of a lease?

Can a landlord be forced to accept a surrender of a lease?