Rent as an expense in administration proceedings

Rent which falls due before a company collapses should now be classed as an administration expense and prioritises a landlord above unsecured creditors.This represents good news for landlords wishing to recover unpaid rent during an administration process and follows on from our earlier article on the order of priority debts in Administration.

Previous High Court Ruling

The High Court ruling in the case of Leisure (Norwich) II Limited and others v. Luminar Lava Ignite Limited (in administration) and others in 2012 meant that rent which falls due before a company collapses would not be classed as an administration expense.

The court ruled the rent should rank equally alongside the claims of other unsecured creditors – even if the administrators continue to use the property during the rent period.

The effect of the Goldacre and Luminar rulings meant that tenant companies entering into administration the day after the quarter day when the rent was due, left the landlord unable to forfeit the lease and only able to recover the rent from the administrator alongside all other unsecured creditors, while giving the tenant the ongoing use of the premises during the administration process.

Court of Appeal

Recently in considering the case of Pillar Denton & Others v. Jervis & Others [2014] EWCA, addressing the administration of a number of Game stores the Court of Appeal has overruled Leisure (Norwich) II v. Luminar Lava Ignite as well as Goldacre (Offices) v. Nortel Networks UK.

In the case of Game, the company went into administration the day after the March quarter rents fell due. The rent for this period came to £10 million with some stores continuing to trade during administration, Game relied on the Goldacre and Luminar rulings that their March quarter rent would not be classed as an administration expense and that the landlords could only recover as unsecured creditors.

A fairer result for landlords

The court of Appeal overruled these earlier decisions reaching a fairer result for landlords. In reaching its judgment the court held that when the property is being used to the benefit of the administration or liquidation, the ‘period of beneficial retention’, rent will accrue on a daily basis, ignoring the due date on the lease, and the office holder must pay this as an expense of the administration. Rent that may fall outside this period of “beneficial retention” will be recovered by the landlord as he would recover any other debt.

This decision puts commercial landlords on an equal footing with other suppliers used during the administration and ahead of the unsecured creditors.

More Information

For more information or to discuss these issues please contact us.

This article was written by Kerry Hull, a Solicitor in our Litigation Team. This article is only intended to provide a general summary and does not constitute legal advice. Specific legal advice should be taken on each individual matter. This article is based on the law as at June 2014.