Factual and Procedural Background
This opinion concerns four applications made by the landlords of properties leased to companies now in administration. The landlords sought (a) permission under Paragraph 43 of Schedule B1 to the Insolvency Act 1986 to forfeit the leases, and (b) a court direction under Paragraph 74 of Schedule B1 requiring the administrators to pay in full the rent accrued due prior to the administrations commencing.
There was no material factual dispute. Prior to the hearing, the administrators consented to the forfeiture of the leases, leaving only the issue of costs unresolved.
The companies in administration formed part of a group known as the Lumina Group, which operated nightclubs across the United Kingdom. Financial difficulties began in June 2011. The leases required quarterly rent payments in advance, but requests to vary payment to monthly were refused. The companies entered administration on 28 October 2011, with administrators intending to trade until 1 January 2012 despite inability to pay rent.
The landlords sought permission to forfeit the leases on 1 December 2011, but the administrators initially refused consent on 2 December 2011. The leases contained express re-entry provisions triggered by unpaid rent exceeding 14 or 21 days. By the end of November 2011, rent for the quarter starting 29 September 2011 was unpaid beyond the relevant period, which would have entitled the landlords to forfeit but for statutory restrictions.
In February 2011, the administrators sold the businesses to a newly incorporated company, Ranimul 2 Ltd ("Ranimul"), which agreed to seek landlord consent for lease assignments and to pay rent and service charges for occupancy pending assignment. Ranimul later declined to proceed with one property, prompting an offer to surrender that lease.
The landlords identified a prospective tenant willing to take leases on similar or existing terms and offered to set off £150,000 against sums due if the administrators consented to assignment. The administrators did not accept this offer, which was withdrawn before the hearing. The landlords contend that delay in granting forfeiture permission prevented re-letting on favourable terms.
Legal Issues Presented
- Whether the administrators are obliged to pay rent that accrued due before the commencement of administration as an expense of the administration.
- Whether the landlords are entitled to recover costs associated with the application for permission to forfeit the leases.
- Whether permission to appeal should be granted regarding the interpretation of rent obligations in administration (the "Lundy Granite" issue).
Arguments of the Parties
Landlords' Arguments
- When a landlord seeks to forfeit a lease post-administration commencement and permission is refused, all unpaid rent becomes payable as an administration expense if it relates to the period of occupation by administrators, regardless of when it accrued.
- The administrators acted unreasonably by refusing permission to forfeit, causing delay and preventing re-letting to preferred tenants on existing terms.
- The administrators either knew or ought to have known that lease assignment to Ranimul was unrealistic, yet persisted in refusing forfeiture permission, applying unfair pressure.
- The landlords made an open offer to settle by assignment to a third party willing to take the leases on existing terms, but administrators obstructed this process.
- The landlords argue they are entitled to costs because they would likely have succeeded had the forfeiture application been fully litigated.
Administrators' Arguments
- The only rent payable as an administration expense is that which falls due after the administration commences and the administrators elect to retain the property.
- The administrators had a legitimate commercial interest in seeking assignment to Ranimul, which offered to pay £174,075 for the leases.
- The landlords’ insistence on conditions for assignment were unreasonable, and there remained a possibility landlords might change their position.
- Following the Court of Appeal in Atlantic Computers, the administrators were entitled to balance proprietary interests against the benefit to the company’s asset position.
- Permission to forfeit was refused initially as part of a balancing exercise, and the administrators' conduct was justified in seeking to maximise value for creditors.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Ellis v Rowbotham [1900] 1 QB 741 |
Rent payable in advance is not apportionable under the Apportionment Act 1870. |
Confirmed that rent accrued due before tenant's loss of possession remains payable in full. |
| Re Toshoku Finance UK plc [2002] 1 WLR 671 |
Clarification of the "Lundy Granite" or "salvage" principle relating to rent as an administration or liquidation expense. |
Applied principle to administration context, emphasizing rent payable as an expense only if accrued after administrator's election to retain property. |
| Goldacre (Offices) Ltd v Nortel Networks UK Ltd [2009] EWHC 3389 (Ch) |
Confirmed application of the Lundy Granite principle to administration as to liquidation. |
Supported that rent payable in advance during retention is an administration expense. |
| Re Progress Assurance Co ex parte Liverpool Exchange Co [1870] LR 9 Eq 370 |
Rent falling due after commencement of winding-up treated as liquidation expense. |
Distinguished from rent accrued prior to commencement; rent after commencement payable as expense. |
| Re Lundy Granite Co ex parte Heavan [1871] LR 6 Ch App 462 |
Rent due after winding-up order is payable as liquidation expense if liquidator retains possession. |
Applied principle to rent accruing post-commencement only. |
| Re Oak Pits Colliery Co [1882] 21 Ch D 322 |
Distinction between rent in arrears at commencement and rent accruing after commencement. |
Held rent in arrears prior to commencement is a provable debt, not an expense; rent accruing after commencement is an expense if property retained. |
| Brown, Bayley & Dixon ex parte Roberts & Wright [1881] 18 Ch D 649 |
Rent accrued prior to winding-up treated as a provable debt, not an expense. |
Supported distinction between pre- and post-commencement rent obligations. |
| Re Silkstone & Dodsworth Coal & Iron Co [1881] 17 Ch D 158 |
Rent payable in arrears after winding-up is payable as an expense if liquidator elects to retain property. |
Held liquidator's election to continue possession creates obligation to pay rent in full for retained period. |
| Re South Kensington Co-op Stores [1881] 17 Ch D 161 |
Distinguished from Silkstone; landlord's right to re-entry affects rent obligations. |
Clarified legal rights to re-entry affect application of rent obligations. |
| Re Atlantic Computer Systems plc [1992] Ch 505 |
Administrators must balance proprietary rights with their duty to maximise asset value during administration. |
Applied to assess reasonableness of administrators' refusal to consent to forfeiture. |
| Brawley v Marczynski (No 2) [2003] 1 WLR 813 |
Principles governing costs orders where substantive issues are settled except as to costs. |
Guided the court in deciding whether to make a costs order despite settlement of substantive issues. |
| R v Holderness Borough Council ex parte James Roberts Developments Ltd [1993] 5 Admin LR 470 |
Courts avoid deciding academic legal issues where no dispute remains, but costs issues require resolution. |
Supported making costs orders when necessary despite substantive settlement. |
| R (Boxall) v Waltham Forest London Borough Council (unreported, 21 December 2000) |
Principles on costs orders following resolution of substantive proceedings without trial. |
Outlined factors courts consider in deciding costs orders post-settlement. |
Court's Reasoning and Analysis
The court analysed the rent obligations applying the "Lundy Granite" or "salvage" principle, which distinguishes rent accrued before the commencement of administration or liquidation from rent accruing after.
The court noted that rent payable in advance and due before administration commencement is a provable debt but not payable as an administration expense, even if the administrator retains the property during the relevant period. This is consistent with the Apportionment Act 1870 not applying to rent payable in advance, and the authorities including Ellis v Rowbotham and subsequent cases.
The court relied on the authoritative statement by Lord Hoffman in Re Toshoku Finance UK plc and the confirmation in Goldacre Ltd v Nortel Networks UK Ltd that the principle applies equally in administration.
Authorities such as Re Oak Pits Colliery Co and Brown, Bayley & Dixon were applied to confirm that rent accrued prior to administration commencement remains a provable debt and not an administration expense, even if the administrator retains possession.
The court rejected the landlords' reliance on Re Silkstone & Dodsworth Coal & Iron Co, holding that it applies only to rent accruing after commencement of winding-up or administration and after election to retain property, not to rent accrued before commencement.
The court acknowledged that statutory provisions now bar landlords from exercising rights of re-entry without administrator consent, unlike at the time of Silkstone, but did not decide whether this affects the principle.
Regarding costs, the court applied principles from Brawley v Marczynski (No 2) and related authorities, concluding that despite the substantive issues being resolved, the substantial costs incurred required an assessment of likely success. The court found the landlords would probably have succeeded on the forfeiture issue due to the strength of their proprietary interests, the administrators' unreasonable refusal to consent to assignment, and the resulting unfair pressure.
Consequently, the court ordered that the administrators pay the landlords' costs of the forfeiture application.
Finally, the court refused permission to appeal the interpretation of the rent obligation issue, concluding the point was not realistically arguable, but granted an extension of time to file an appellant's notice.
Holding and Implications
Holding: The court held that rent payable in advance and due before the commencement of administration is not payable as an administration expense, even if the administrator retains the property for the purposes of the administration. The landlords are not entitled to recover any part of the rent accrued prior to administration commencement as an administration expense.
Regarding the forfeiture application, the court found that the landlords would likely have succeeded had the matter been litigated, and therefore ordered that the administrators pay the landlords' costs of that application.
Permission to appeal on the rent issue was refused as the court found no realistic arguability.
Implications: This decision clarifies the application of the "Lundy Granite" principle in administration, reinforcing the distinction between rent accrued pre- and post-administration commencement for payment as an administration expense. It confirms that landlords cannot recover rent accrued before administration commencement as an administration expense, even if the administrator retains the property. The ruling also underscores the importance of balancing proprietary rights and the administrators' duties, particularly in relation to lease forfeiture and costs. No new precedent was established beyond confirming existing principles.