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Rent falling due before administrators appointed is not an expense of the administration, court says

Rent falling due before administrators are appointed should not be treated as an expense of the administration, even where the administrators continue to trade the business from the rented premises for part of the rent period, the High Court has confirmed. 02 Apr 2012

The ruling follows on from the judgment in a 2009 case involving landlord Goldacre that found that any rent falling due after administrators are appointed will automatically rank as an expense of the administration, meaning that the landlord will almost always be paid off in full before other debts are settled.

Property law expert Stuart McCann of Pinsent Masons, the law firm behind, said that the decision meant that any rent falling due before administrators were appointed would not be given priority over other unsecured debts. However, he said that there was a "realistic prospect" that X-Leisure, the landlord of various nightclubs leased by insolvent operator Luminar, would appeal.

"This is clearly disappointing news for landlords, and many of them will question the logic and fairness of the decision," he said.

Administrators from Ernst & Young were appointed to various companies within Luminar in October 2011 at which point quarterly rents, payable in advance and due in September, had already fallen into arrears. The clubs continued to operate, and Ernst & Young successfully sold 60 to another operator, trading as Ranimul 2, in December.

X-Leisure, the  landlord of four of the clubs, had 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. The landlord said that that was because the administrator had refused to give it consent to forfeit while it attempted to transfer the lease to a new owner.

In a 2009 High Court case, landlord Goldacre successfully argued that where administrators continued to trade from leasehold property while they tried to find a buyer for insolvent Nortel Networks the whole advance rent, falling due after they were appointed, must be treated as an expense of the administration as it could not be apportioned even if the administrator stopped using the property before the end of the relevant rent period. Similarly in the Luminar case, the court said, rent could not be apportioned before and after the date of administration – leaving the rent to be treated as any other unsecured debt.

Property law expert Stuart McCann said that administrators would be encouraged to "act strategically" by the decision and were likely to wait to place companies into administration immediately after the relevant 'quarter day' when rent for the next three months became due.

"It is probably no coincidence that, earlier this week, The Game Group Plc was placed into administration only four days after the March quarter date following weeks of speculation about its financial position," he added.

The administrators conceded a forfeiture claim brought by X-Leisure shortly before the case was heard, leaving X-Leisure free to assign the leases to another tenant, according to Property Week.