Cheshire West & Chester Borough Council

Factual and Procedural Background

The petitioners are the landlords of premises located at 91/92 High Street, Worcester ("the premises"). The Defendant company was the tenant of these premises and entered administration on 25 March 2008, with the Appellees appointed as administrators. The administrators traded the company's business from the premises until approximately 2 May 2008. Subsequently, on or about 19 May 2008, the administrators sold the business to Company A, and as part of the sale agreement, granted a licence to occupy the premises to Company B, despite a lease provision prohibiting underletting or sharing possession.

Company B took occupation of the premises on or about 19 May 2008. Correspondence between the parties' agents indicated intentions regarding assignation of the lease; however, the petitioners never received the requested information nor an executed licence agreement. No rent payments were made to the petitioners after 19 May 2008 by any party. On 20 November 2008, the administrators notified the petitioners that the licence terminated on 18 November 2008 and that no further rent payments would be made by them. The petitioners changed the locks on 14 May 2009, effectively terminating the lease under English law. The petitioners then sought a court order under paragraph 74(3)(e) of Schedule B1 to the Insolvency Act 1986, requiring the administrators to pay all sums due under the lease from 2 May 2008 to 1 April 2009 as an expense of the administration.

Legal Issues Presented

1. Whether the petitioners' application for payment of rent as an expense of the administration was properly brought under paragraph 74 rather than paragraph 43 of Schedule B1 to the Insolvency Act 1986.
2. Whether rent payable under a pre-existing lease during administration is a mandatory administration expense or subject to the court's discretion.
3. Whether the administrators' granting of a licence to a third party to occupy the premises without an executed licence or personal guarantee constitutes unfair harm to the petitioners under paragraph 74.
4. Whether the occupation of the premises by a third party pursuant to the licence falls within the Lundy Granite principle, entitling the petitioners to payment of rent as an administration expense.

Arguments of the Parties

Appellees' Arguments

• The application was misconceived under paragraph 74 and should have been made under paragraph 43, which provides a statutory moratorium on claims against a company in administration.
• Even if the administrators had occupied the premises, payment of rent as an administration expense is discretionary and should be refused in this case.
• The administrators had not been in occupation since 2 May 2008, so the lease does not fall within the Lundy Granite principle.
• The petitioners failed to demonstrate unfair harm caused by the administrators' actions as required under paragraph 74.
• The administrators acted reasonably by granting licences to facilitate the sale of the business and did not personally adopt any contracts or liabilities post-sale.

Petitioners' Arguments

• The application was properly brought under paragraph 74 as it concerns unfair harm caused by the administrators' actions rather than a claim against the company.
• The administrators caused the petitioners' premises to be used by a third party without a contractual relationship, depriving them of rent due under the lease, which constitutes unfair harm.
• Rent payable under a lease used for administration purposes is a mandatory administration expense, not discretionary.
• The administrators granted occupation without an executed licence or personal guarantee, preventing enforcement of rent payment by either party.
• The occupation of the premises by the third party falls within the Lundy Granite principle, entitling the petitioners to rent as an administration expense.
• The petitioners made reasonable requests for information about the purchaser's suitability as assignee, which were ignored.
• The petitioners did not consent to the licence or waive their rights, nor did they negotiate terms.

Reply for the Appellees

• The administrators acted reasonably, relying on legal advice that the sale and occupation arrangement was concluded.
• The licence included provisions allowing landlords to terminate possession at any time.
• The Insolvency Rules and case law establish that rent under an existing lease is not automatically an administration expense but may be ordered as such under the Lundy Granite principle.
• The petitioners were aware they could terminate the licence but did not do so.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
In re Lundy Granite Company Ex parte Heavan (1871) LR 6 Ch. App 462	Principle that rent payable for premises occupied by liquidators for liquidation purposes is an expense of the liquidation.	Applied as a flexible principle in administration context; administrators' occupation or control can render rent an administration expense.
In re Oak Pits Colliery Co (1882) 21 Ch. D 322	Application of the Lundy Granite principle regarding occupation and rent expenses in liquidation.	Distinguished on facts but relevant for principles on occupation and rent liability.
In re Toshoku Finance UK Plc [2002] UKHL 6; [2002] 1 WLR 671	Clarification that rent under pre-existing leases is not automatically an administration expense; court has discretion in administrations.	Held that the flexible approach applies to administrations; rent is not automatically an expense but may be ordered as such.
In re Atlantic Computer Systems Plc [1990] Ch 505	Distinction between liquidation and administration expenses; discretion in administration cases.	Supported flexible discretionary approach for administration expenses, distinguishing from liquidation.
Innovate Logistics Limited (In Administration) v Sunberry Properties Limited [2008] EWCA Civ 1261	Landlords do not have absolute entitlement to contractual rent as administration expense; court exercises discretion on remedy.	Applied flexible discretion in administration expenses; rent payable as matter of obligation but extent of remedy discretionary.
Exeter City Council v Bairstow [2007] EWHC 400 (Ch); [2007] 4 All ER Ch.D. 437	Non-domestic rates payable as expenses of administration; rent liability as mandatory obligation under rules.	Supported view that administration expenses are governed by rules with limited discretion; rent payable as mandatory obligation.
In re Lehman Brothers International (Europe) Limited (No.3) [2009] EWHC 2545 (Ch)	Flexible approach to administration expenses and application of Lundy Granite principle.	Applied discretion in administration expenses consistent with rescue culture; rent treated as administration expense under rules.
Goldacre (Offices) Limited v Nortel Networks UK Limited [2009] EWHC 3389 (Ch); [2010] 3 WLR 171	Held rent is payable as mandatory obligation if within Insolvency Rules; discretion excluded.	Rejected by the court as wrongly decided; discretion remains important in administration context.
In re Lehman Brothers International (Europe) (In Administration) [2008] EWHC 2869 (Ch)	Requirement to show unfair harm caused by administrator's actions to succeed under paragraph 74.	Reinforced that unfair harm must be demonstrated causally linked to administrator's conduct.
Fashoff (UK) Limited v Linton [2008] EWHC 537 (Ch); [2008] BCC 542	Court's powers to grant relief under paragraph 74 for unfair harm caused by administrators.	Confirmed paragraph 74 as proper vehicle for complaints about administrators' conduct causing unfair harm.

Court's Reasoning and Analysis

The court first addressed the procedural appropriateness of the petitioners' application under paragraph 74 of Schedule B1 rather than paragraph 43. It found that paragraph 74 was appropriate because the petitioners were not initiating legal proceedings against the company or its property but complaining about the administrators' conduct causing unfair harm.

The court then examined whether rent payable under the lease during administration is a mandatory administration expense or discretionary. While initially attracted to the flexible discretionary approach from the Court of Appeal's decision in Atlantic Computer Systems, the court concluded that subsequent House of Lords authority in Toshoku and amendments to the Insolvency Rules aligned administration expense rules with those of liquidation, removing discretion as to whether rent is an administration expense.

Applying the Lundy Granite principle, the court found that occupation of the premises by a third party pursuant to the administrators' licence fell within the principle, entitling the petitioners to treat rent as an administration expense. The administrators had permitted occupation in breach of the lease without executed licences or guarantees, depriving the petitioners of rent and enforcement rights. The administrators' actions were for the benefit of the administration and creditors but unfairly harmed the petitioners.

Although the petitioners were not entitled to immediate payment due to the order of priorities in administration expenses, the rent claim must be treated as an administration expense. If discretion existed, the court would exercise it in favour of the petitioners, given the administrators' failure to consult or protect the petitioners' interests adequately.

The court rejected the respondents' argument that the petitioners could have terminated the licence earlier and found that the petitioners had made reasonable efforts to engage with the administrators and purchasers regarding the lease assignation, which were ignored.

Overall, the court found that the petitioners had averred a relevant case of unfair harm caused by the administrators' actions and refused the respondents' motion to dismiss the petition.

Holding and Implications

The court REFUSED the respondents' motion to dismiss the petition, holding that:

• The petitioners' application under paragraph 74 of Schedule B1 was appropriate.
• Rent payable under the lease for premises occupied by a third party pursuant to the administrators' licence is a mandatory administration expense under the Insolvency Rules, applying the Lundy Granite principle.
• The administrators' conduct in permitting occupation without executed licences or guarantees unfairly harmed the petitioners.
• The petitioners are entitled to have their rent claim treated as an expense of the administration, though not necessarily to immediate payment.

The court did not issue a final order at this stage but indicated that the matter would be put out By Order to allow the parties to agree on the precise terms of the order sought. No new legal precedent was established; rather, the decision applied and clarified existing principles regarding administration expenses and the court's discretion.