Landlords have been dealt a blow after the High Court ruled that rent which falls due before a company collapses should not be classed as an administration expense.
Instead 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.
His Honour Judge Pelling QC ruled in favour of nightclub operator Luminar Group which fell into administration in October.
X-Leisure, the landlord of the group at four of its nightclubs, failed with its argument that the rent falling due in September, prior to the administrators’ appointment, was payable as an expense of the administration.
Hogan Lovells, which argued on behalf of the administrators, successfully applied the ruling previously made on the Goldacre (Offices) v Nortel Networks UK case.
This had asserted 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.
Real estate disputes partner Mathew Ditchburn, of Hogan Lovells, which advised the Luminar’s administrators, said: “This ruling provides welcome clarity regarding the law relating to payment of rent as an administration expense, confirming that pre-appointment rent is not an expense of the administration.
“However, the current regime continues to present difficulties to all stakeholders in an administration.
“A ‘pay as you go’ approach to rents may be the answer but this would require more co-operation between landlords and administrators, or the Goldacre ruling to be overturned by the Court of Appeal.”
Following its fall into administration, Ernst & Young administrators secured the sale of some 60 Luminar nighclubs in December.
Commenting about the ruling, Glen Davis QC, an insolvency barrister from South Square, added: “The Luminar decision is probably technically right as the law presently stands, unless and until Goldacre is reviewed by the Court of Appeal.
“It would be fairer if there was some flexibility to apportion rent when a company is in administration, but to achieve that is likely to require legislation.
“Meanwhile, the date rent falls due will need to be considered when administration appointments are made, and in some cases the timing of the appointment will have significant economic consequences for the estate and for landlords.”