Rent as an expense of the administration: an update

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We reported in our last newsletter that the High Court has granted permission in the Games Station administration on the question of the circumstances in which rent and service charges are to be treated as an expense of an administration.

The current position, following Goldacre [1] and Luminar [2], is that rent and service charges payable in advance and which fall due before the appointment of an administrator are not considered an expense of the administration, but where such rent falls due during a period when the administrator was occupying the property for the purposes of the administration, then the whole sum ranks as an administration expense.

In the Games Station administration, the court ordered that the arrears of rent falling due before the date of the administration were not payable as an expense in the administration and therefore ranked as unsecured claims. Rent falling due during the course of the administration was payable as an administration expense. The landlords were given permission to appeal on the first point and the buyers of the business in occupation of premises under licence from the administrators were given permission to appeal on the second point.

Hopefully the Court of Appeal decision next year will clarify once and for all the position regarding rent. In the meantime, what should administrators be doing?

Without second-guessing the Court, there is, at the very least, a possibility that Goldacre will be overturned and that the position will revert to one of payment for period of occupation rather than being dependent upon occupation when the date for payment of the rent falls due. In the circumstances, it would be sensible for administrators to reserve for rent on a period of occupation in an administration, even if the administrator is appointed after the quarter date and vacates before the next quarter’s rent falls due. This obviously has costs implications arising from an extension of the administration but it is the prudent course given that all administrators will be aware of the challenge being mounted to the existing case law.

Whilst the case concerns administrations, the implications are the same for receivers.

[1] Goldacre (Offices) Ltd v Nortel Networks UK Ltd (In Administration) [2009] EWHC 3389 (Ch) [2010] Ch 455

[2] Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd (In Administration) [2012] EWHC 951 (Ch) [2012] 4 All ER 894