The High Court considers the status of claims for rent in an administration in Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd (in Admin) [2012] EWHC 951 (Ch) [2012] B.C.C. 497

The problem

Most payment obligations incurred by a company prior to the date it goes into administration or liquidation are what are known as “provable debts” i.e. every creditor submits a proof of their debt and the available pot of assets is divided between them pro rata. But the very process of orderly administration or liquidation of an insolvent company costs money, and the legislation dictates that these “expenses” of the insolvency process get paid out of the pot fi rst, ahead of provable debts.

Because there is a fi nite pot to distribute, it is in the interests of the landlord of the premises of an insolvent company to argue that the unpaid rent due is an expense rather than a provable debt, to rank ahead of the company’s general creditors. The lists of administration expenses and liquidation expenses (found in rules 2.67 and 4.218 of the Insolvency Rules 1986 respectively) do not expressly include rent, but the Court has held that in some circumstances rent is payable “as if” it were a liquidation /administration expense.

On 28 March of this year His Honour Judge Pelling QC (sitting as a Judge in the Chancery Division) considered an application by landlords for orders requiring the administrators of the respondent tenant companies to pay pre-administration rents in full as administration expenses with priority over provable debts in Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd (in Admin.) (“Luminar”).

The facts

The respondent group of companies had been one of the largest nightclub operators in the UK. They leased four properties from the applicant landlords with rent payable quarterly in advance on each quarter day. At the time of the administrators’ appointment the companies had fallen into arrears with the rents. The main issue in the case was whether the administrators were obliged to pay the accrued rent as an expense of the administration even though it fell due before their appointment.

The landlords argued that all unpaid rent became payable as an expense, irrespective of when it had fallen due, if and to the extent that it applied to a period of occupation by the administrators. The administrators argued that the only rent that could become payable as an expense was rent falling due after the administration had commenced and the administrators had elected to retain the relevant property for the purposes of the administration.

The decision

His Honour Judge Pelling QC directed that the landlords were not entitled to the rent which fell due prior to the administration as an administration expense. He summarised the position of rent in corporate insolvency as follows:

  1. Where rent payable in advance became due while the office holder (administrator or liquidator) was retaining the property, the whole sum was payable as an expense. This would be so even if the office holder gives permission to the landlord to forfeit the lease, or vacates the premises before expiry of the period for which the payment in advance is due, since rent payable in advance is not subject to the Apportionment Act 1870. This was the decision of Judge Purle QC in Goldacre (Offices) Ltd v Nortel Networks UK Ltd (In Administration) [2009] EWHC 3389 (Ch); [2010] Ch. 455; [2010] B.C.C. 299 (“Goldacre”);
  2. However, if rent payable in advance falls due for payment prior to a liquidation or administration, then it is a provable debt. It is not payable as an expense, even though the office holder retains the property for the purposes of the liquidation or administration for the whole or part of the period for which the payment in advance was payable.
  3. Where rent is payable in arrears, if it accrues due during a period when the administrator or liquidator is retaining property for the purposes of the liquidation or administration, the office holder must pay as an expense at least the rent that accrued from day to day for so long as he or she retains possession of the premises for the purposes of the liquidation or administration. He declined to express a view on whether the officeholder will be liable to pay that part of the rent that has accrued in arrears that is referable to a period prior to the commencement of the administration or liquidation.

Some brief thoughts

Luminar followed Goldacre (which was criticised widely within the insolvency community when it was decided since it placed an onerous obligation on offi ce holders to pay a full quarter’s rent even where they used the premises minimally and vacated early), but struck back for offi ce holders where the rent fell due prior to the liquidation (when the offi ce holder appointed just after a quarter day would have the benefi t of 3 months occupation ‘for free’).

One effect of the decision is that leases with monthly rents might be a more attractive option to landlords, since if the tenant goes into administration or liquidation the most the office holder could benefi t from is a month of occupation without being obliged to pay rent as an expense. However, monthly rental payments would impose an increased administrative burden for landlords and a loss of the cash fl ow benefi t of receiving 3 months rent in advance. One possible way of circumventing this might be by drafting a lease which provides for a shorter rental period to kick in on the occurrence of an “insolvency event”.