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Administrators not liable for advance payments of rent which became due prior to their appointment

15/05/2012

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United Kingdom

Administrators not liable for advance payments of rent which became due prior to their appointment

Informer Features

 

Administrators not liable for advance payments of rent which became due prior to their appointment

Landlords were dealt a blow when a recent High Court judgment ruled that rent which falls due before a company enters administration should not be classed as an expense of the administration. Instead the High Court confirmed that the rent should be ranked equally with the claims of other unsecured creditors - even when the administrators continue to use the property, and indeed trade the business from the rented premises, during part of the rent period.

The case concerned Luminar Group (T), one of the largest nightclub operators in the UK.  Luminar rented 4 nightclubs from the X-Leisure Group (L). Rent was payable quarterly in advance on the usual quarter days.

L brought a claim for £300,000 in rent arrears which had accrued before T went into administration in October 2011. At the time of the administrator's (A's) appointment, T had fallen into arrears. 

The 4 clubs continued to operate, and A successfully sold 60 further sites to another operator in December 2011.

L failed in its argument that, when a company continues to trade on leased property, for the benefit of its creditors and in the same trading or business capacity, the rent should be treated as a cost of the administration. L's reasoning was that this should be a cost of the administration was because A had refused to give consent to forfeit the leases while it attempted to transfer them to a new owner.

The court followed the 2010 ruling in Goldacre v Nortel where the court held that when rent falls due during an administration, the administrators would have to pay the whole of the quarter’s rent as an expense – even if they were to vacate the property after a few days. In this instance, the rent had fallen due prior to A's appointment and, therefore, confirmed that pre-appointment rent is not an expense of the administration and so would not be given priority over other unsecured debts. 

It would seem that the date when rent is due should be considered when appointing administrators, since the timing of the appointment, in some cases, could have major economic consequences for the company which is about to go into administration and for their landlords.

Paul Olliff, Solicitor in Real Estate at Field Fisher Waterhouse LLP

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