The High Court has ruled in the case of Luminar Group, a nightclub operator versus X-Leisure, the landlord of a number of its night clubs.
Luminar went into administration in October 2011 and X-Leisure took administrators Ernst & Young to the High Court to extend a controversial precedent set in 2009 by Goldacre v Nortel Networks UK.
Under the Goldacre ruling, if a company in administration uses leasehold property for the benefit of its creditors, any rent due in the period of use counts as an expense of the administration and should be paid, but this does not extend to rent due before the appointment of administrators.
Luminar went into administration on 26 October last year, but had not paid rent for the final quarter of the year, which had been due on 29 September, and the administrators continued to operate the nightclubs.
The High Court ruling means 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.
Commenting about the ruling, Glen Davis QC, an insolvency barrister from South Square, stated:
“The Luminar decision is probably technically right as the law presently stands, unless and until Goldacre is reviewed by the Court of Appeal.
“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.”
Vigilance is therefore the order of the day. If you have good reason to be concerned that administrators are about to be called in and your tenant’s rent is 21 days or more overdue (or the time period specified in the lease), you may want to give serious consideration to forfeiture of the lease or, perhaps more appropriately, protective distraint.
David is the former CEO of The Sheriffs Office.