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High Court rejects rent during administration legal challenge

Published 29th Mar 2012

A key ruling on the payment of rent during administration has been handed down in the high court today following a legal battle between X-Leisure and Ernst & Young.

A judge in the High Court has ruled that rent owed to a landlord prior to the appointment of administrators should not be treated as a cost of the administration.

Property Week revealed earlier this month that leisure landlord X-Leisure was seeking legal action against the administrators of the UK’s largest nightclub operator, Luminar, in an attempt to change the law surrounding the payment of rent during administrations.

X-Leisure took Ernst & Young to the High Court on Monday to seek to extend a controversial precedent set in 2009 by Goldacre v Nortel Networks UK, which would enable landlords to recoup their losses when rent is not paid on the quarter date and administrators are subsequently appointed and continue to trade the business.

Under the Goldacre ruling, if a company in administration uses leasehold property for the benefit of its creditors, any rent due in the period of use ranks as an expense of the administration and should be paid, but this does not extend to rent due before the appointment of administrators.

Luminar went into administration on 26 October last year, but had not paid rent for the final quarter of the year, which had been due on 29 September, and the administrators continued to operate the nightclubs.

But the judge has today returned his verdict stating that rent owed prior to the appointment of administrators is not a cost of administration.

Julie Gattegno, real estate dispute resolution partner at Nabarro, said: “Landlords will be disappointed that common sense did not prevail in this case. Administrators will continue to think tactically about when to put a company into administration. This is starkly demonstrated by the Game insolvency, where the company was put into administration the day after the quarter day.

“Landlords will now face further challenges in recovering rent which fell due before administrators were appointed, even when the insolvent business is trading from the premises for the majority of that quarter. Though it looks like the landlord in Luminar will try to appeal.”

The decision is thought to have come after the judge heard that allowing the extension to Goldacre could lead to administrations becoming insolvent.

The case comes after F&C Reit Asset Management and Frogmore sought the same challenge against Ernst & Young last year, following the administration of discount retailer TJ Hughes, but this case was settled out of court.

It is understood that following the court case X-Leisure has now taken a forfeit of the leases to Luminar.

The nightclubs at the centre of the case were JJ’s and Liquid and Envy at Lockmeadow in Maidstone, Project at Riverside Entertainment in Norwich and Oceana at Xscape Milton Keynes.

Source: ' Property Week '

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