A key ruling on the payment of rent during administration was handed down on 29 March 2012, in the case of X-Leisure - v- Luminar Group (in administration), where the High Court (Judge Pelling QC) held that rent owed to a landlord prior to the appointment of administrators should not be treated as an expense of the administration, but should instead be treated as any other unsecured debt.
This marks an interesting application of the 2009 case of Goldacre (Offices) Ltd – v Nortel Networks UK Ltd (in administration), where it was held that if administrators continue to trade a business from leasehold property (generally whilst they try to find a buyer for the insolvent business), then the whole advance rent, falling due after the appointment of the administrators, must be treated as an expense of the administration and cannot be apportioned, even where the administrator stops using the property before the end of the relevant quarter. However, the Goldacre ruling did not extend to rent due before the appointment of the administrators, and the Luminar ruling makes clear that any rent due before such appointment should not be treated as a cost of the administration.
Administrators from Ernst & Young were appointed to various companies within the Luminar Group in October 2011. Luminar Group is the UK's largest nightclub operator, and at the time of the appointment, had not paid the rent due to its landlords for the final quarter of the year, which became due on 29 September 2011. The administrators continued to operate the nightclubs.
X-Leisure, the landlord of four of the nightclubs, argued that if a company continued to trade on leasehold property for the benefit of its creditors, rent should be treated as a cost of the administration. In particular, Ernst & Young had refused to consent to the forfeiture of the leases, whilst it tried to transfer them to a new owner.
White & Case Comment
The Luminar case marks a subtle yet very important interpretation of the Goldacre case. X-Leisure are expected to appeal the decision, but until such time as any appeal is successful, the upshot is that any rent which becomes due for payment prior to the appointment of administrators will not rank as an expense of the administration. This is bound to lead to more businesses tactically being sent into administration shortly after (but not before) each of the usual quarter days, as was seen with retailer Game, which was put into administration the day after the quarter day (on 26 March 2012). The decision is clearly bad news for Landlords, who in a tough market will continue to face challenges when recovering rent from financially troubled tenants, which falls due before administrators are appointed, despite the insolvent business trading from the premises for the majority of the relevant quarter for which the rent is payable.
This decision comes after F&C Reit Asset Management and Frogmore sought the same challenge against Ernst & Young last year, following the administration of department store retailer TJ Hughes, but this case was settled out of court.
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