Tenant Insolvency: A Cautionary Tale for Landlords

Tenant Insolvency: A Cautionary Tale for Landlords

In Shinners and another (Joint Administrators of London Bridge Entertainment Partners LLP) -v- London Trocadero (2015) LLP [2019] EWHC 2932 (ch) the English High Court has held that a tenant’s contractual obligation to top up a secured rent deposit should not be paid to the landlord as an administration expense.

FACTS

London Bridge Entertainment Partners LLP (the “Tenant”) occupied parts of the iconic London Pavilion (the “Property”) pursuant to two Leases granted by London Trocadero (2015) LLP (the “Landlord”) (the “Leases”). The Landlord had the benefit of a rent deposit in excess of £2 million as security for the obligations of the Tenant under the Leases.

In September 2017 the Tenant entered into administration and a few days later rent, which was payable quarterly in advance, fell due for payment pursuant to the Leases. When the rent was not paid by the Tenant the Landlord elected to withdraw the rent due from the rent deposit and served a notice on the Tenant to replenish the rent deposit. This notice was ignored by the administrators. In December 2017 the Leases were forfeited with the consent of the administrators.

ISSUES

All parties agreed that the Property had been retained by the administrators of the Tenant for the benefit of the administration and that the rent which accrued from the date of the administration of the Tenant until the forfeiture of the Leases would have been payable as an expense of the administration.
The issue in this case was the fact that the rent due for the period of the administrators’ beneficial occupation of the Property had been paid when the Landlord elected to withdraw it from the rent deposit.
The Landlord argued that although it had received the rent due for the period of the administrators’ occupation of the Property, the rent deposit should be topped up as an expense of the administration to cover other sums due under the Leases such as dilapidations and losses arising from the forfeiture of the Leases. The administrators rejected this argument and applied to the Court for directions.

FINDINGS OF THE COURT

The Court held that the Tenant’s obligation to top up the rent deposit should not be treated as an expense of the administration. In reaching this conclusion the Court noted the following:


1. The rent which would have been payable as an administration expense had been paid when the Landlord voluntarily elected to withdraw it from the rent deposit. The obligation to top up the rent deposit was an obligation to provide security for the same claim which had been paid and any top up of the rent deposit by the administrators would offend the rule against double proof; and


2. The other losses incurred by the Landlord pursuant to the Leases and secured by the rent deposit could only be classified as administration expenses to the extent that they were incurred during the administrators’ occupation of the Property and benefited the Tenant’s insolvent estate. In this case the Court found that the Landlord had not established that the top up payment would be “likely to assist achievement of the purpose of the administration”.


COMMENT

Landlords should pay particular attention to the unfortunate use of the rent deposit by the Landlord in this case. Had the Landlord claimed the rent due during the administration of the Tenant as an administration expense in the first instance rather than resorting to the rent deposit the full amount of the rent deposit would have been available to discharge other sums, such as dilapidations, due under the Leases.

When faced with an insolvent tenant, landlords should ensure that all rent which may be claimed as an expense of the insolvency process is recovered before resorting to any rent deposit.

 

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If you have any queries in relation to this update or in relation to general insolvency matters please contact Lindsey Harten

 


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