Is paying the landlord always a priority?
Author – Stephen Baister, Consultant
Where an administrator retains the use of company premises for the purposes of the administration, the rent accruing due is treated as an administration expense and is payable in priority to the claims of other creditors: floating charge and preferential as well as unsecured creditors (see Jervis v Pillar Denton Ltd [2014] EWCA Civ 180; [2015] Ch 87). But commercial landlords must be careful if they want to avoid losing that advantage, as the recent decision in Re London Bridge Entertainment Partners LLP [2019] EWHC 2932 (Ch) demonstrates.
The basic facts of London Bridge can be simply stated. The company had entered into a lease and a rent deposit deed. Administrators were appointed on 29 September 2017 just before rent was due under the lease on 1 October. Unsurprisingly, it was not paid. On 9 October the landlord paid itself the rent out of the deposit it held and required the company to top it up as it was obliged to under the terms of the rent deposit deed. The administrators took the view that the landlord had to prove as an unsecured creditor in the administration for that debt, thereby losing its priority status.
The issue the court had to decide was whether the company’s obligation to top up the deposit fell to be treated as an expense of the administration under the Lundy Granite principle, so named after the decision in Re Lundy Granite Co (1870-71) LR 6 Ch App 462, which first determined the right of a landlord to the payment of rent after liquidation where the company retained possession of the property. It is also often called the salvage principle, which was described by Lord Hoffmann in Re Toshuku Finance UK plc [2002] UKHL 6; [2002] 1 WLR 671 as:
“[O]ne which permits, on equitable grounds, the concept of a liability incurred as an expense of the liquidation to be expanded to include liabilities incurred before the liquidation in respect of property afterwards retained by the liquidator for the benefit of the insolvent estate”.
Lewison LJ in Jervis v Pillar Denton Ltd called it “a judge-made deeming provision under which the office holder is deemed to have incurred the liability in the course of the winding up or administration”.
ICC Judge Barber held in Re London Bridge that the Lundy Granite principle did not extend to the top up obligation: liability for the administrators’ continued use of the property had to arise as a result of actions of the administrators for the benefit of creditors, not those of the landlord; so if the landlord had not drawn on the deposit, the unpaid rent would have been payable as an expense of the administration in priority to the claims of other unsecured creditors of the company.
The judgment in the case is dense, tightly argued, and runs to over 160 paragraphs; but it contains everything you need to know on the subject as the law currently stands.