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18th December 2019

Obligation to top up secured rent deposit is not an expense of the administration

By Mira Arezina

In the first quarter of 2019, companies entering administration increased by 21.8% from the final quarter of 2018.  Although administration is a way for the company to attempt to salvage itself as a going concern and/or to recover more money for the creditors than if it were wound up, the concern for landlords is whether they will be able to recover rent and other sums due under the lease for so long as the administrator is using the property for the purposes of the administration.

In accordance with the principles in re. Lundy Granite Co, ex parte Heavan [1871] when a company enters administration and the property is being used for the purposes of the administration, the administrators are liable to pay the rent and other outgoings from the date of their appointment until the occupation is brought to an end.

However, issues arise because, although administrators are liable for these costs, there is no requirement that they have to make these payments in accordance with the terms of the lease e.g. on the usual quarter days.

Accordingly, where there is a rent deposit deed, a landlord could be tempted to draw down on this thinking the administrators might be required to top it up.  In the case of Henry Shinners and Nick Myers (Joint Administrators of London Bridge Partners LLP) v London Trocadero (2015) LLP [2019] the Court held the costs of topping up a rent deposit deed is not an expense of the administration.

Background

The landlord, London Trocadero Limited (“Trocadero”) and the tenant London Bridge Entertainment Partners Limited (“London Bridge”), entered into a lease of premises situated within The London Pavilion, 1 Piccadilly, London W1 (“the Property”), for a term of 25 years from 2 November 2007 (“the Lease”).  At the same time, they entered into a rent deposit deed.

On 29 September 2017 London Bridge went into administration and Henry Shinners and Nick Myers were appointed as joint administrators of London Bridge (“the Administrators”).

On 1 October 2017 the rent became due in accordance with the Lease.  This was not paid. On 9 October 2017 Trocadero drew down the rent from the rent deposit deed and demanded the Administrators top up the rent deposit.  The Administrators agreed the property had been used for the purposes of the administration and that rent was payable as an expense of the administration.  However, the administrators’ position was that as the rent had been paid from the rent deposit deed, no rent was due.

Trocadero also served a notice pursuant to s.146 of the Law of Property Act 1925 for other breaches of the Lease.

The Administrators were asked to consent to the forfeiture, which they initially refused and so Trocadero applied to the Court for permission to forfeit the Lease (“the Application”).  The Administrators eventually consented to the forfeiture and on 22 December 2017 the Lease was forfeited.

The Application was subsequently amended seeking directions regarding the expense of the administration and obligations of London Bridge during the period the Property was used for the benefit of the administration.

The Court was asked to decide on certain preliminary issues including whether the Administrators were required to top up the rent deposit deed.

The Decision

The High Court held that a tenant’s contractual obligation to top up the rent deposit could not be met and paid as an expense of the administration; unlike paying the rent, where there is a benefit to the Administrators, there is no benefit in topping up the rent deposit deed.

Conclusion

This decision provides an unusual perspective on this well-trodden area of law and serves as a cautionary tale for landlords to not immediately resort to drawing down on a rent deposit deed for debts which could otherwise be recovered as an expense of the administration.

Obligation to top up secured rent deposit is not an expense of the administration

Have a question? Contact Mira

Have a question? Contact Mira

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