With the number of retail administrations up 15% in the first quarter of 2012 compared to a year ago (according to research by Deloitte), the recent High Court case of Leisure (Norwich) II Limited v Luminar Lava Ignite Limited (in administration) 28 March 2012 will be of particular interest to landlords.  They will not be pleased with the decision that unpaid rent which falls due prior to the appointment of an administrator/liquidator amounts to an unsecured claim against the insolvent tenant.  It is not to be treated as an expense of the administration/liquidation (and will not be paid by the administrator/liquidator in priority to preferential creditors, floating charge creditors and unsecured creditors).

The facts

The landlords of four properties let to companies within the Luminar Group (previously one of the UK’s largest nightclub operators) took the administrators of the Luminar companies to court.  The landlords claimed that the administrators should pay, as an expense of the administration, the unpaid September quarter's rent that fell due prior to the Luminar companies going into administration on 26 October 2011. 

The decision

Judge Pelling QC rejected the landlord's claim holding (in relation to rents payable in advance) that:

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

It is the timing of when the liability to pay arises which is key.  Take the Game Group as an illustration.  The games retailer went into administration the day after the 25 March 2012 quarter day owing £21m in unpaid rent.  The administrators can continue to use the premises until the June quarter without having to pay rent as an expense of the administration.  Game's landlords can prove for the March quarter rents as unsecured creditors (but in practice are unlikely to recover the arrears).  The position would have been different, however, had the administrators been appointed on 24 March and continued to use the premises (even for just one day)  after liability to pay the March quarter rent arose; the whole of the March quarter's rent would then have been recoverable as an expense of the administration.

Comment

The decision will obviously influence the timing of future administrations; administrators will be keen to secure the additional 'rent free' period to attempt to trade back into solvency or secure a sale of the business and we will no doubt see more appointments closely following rent payment dates.

For landlords it is bad news.  Alongside the K/S Victoria Street v House of Fraser (Stores Management) Ltd and others [2011] decision on guarantees and the possibility of distress being abolished, the Luminar decision further erodes the landlords' options to recover unpaid rent when a tenant is in financial difficulty.

Landlords may now be more willing to move to monthly rents. Reducing the period between rent payment dates will limit the period administrators/liquidators can trade without paying rent as an expense of the administration/liquidation (and thus limit a landlord's exposure).  Where tenants are in financial difficulty and ask for the landlord to consider monthly rents, the possibility of losing a whole quarter's rent rather than one month's rent is an important consideration.

We may also see other changes to leases following this decision; clauses automatically providing for rent to switch from quarterly to monthly payments following tenant insolvency could also start to creep into standard forms.