Rent deposit deed: the order of priority of payments in an administration

Judge Barber has considered the order of priority of payments in an administration and - more specifically - whether the Lundy Granite principle applies to both the rent payable once a company has gone into administration, and to the “top up” obligation requiring the company to replenish a rent deposit, where a landlord had drawn down on the deposit against unpaid rent (Re London Bridge Entertainment Partners LLP (in administration) [2019] EWHC 2932 (CH)).

The Rules

Under the Insolvency Rules and the ‘waterfall’ of priority, expenses of the administration precede unsecured provable debts. It is in a creditor’s favour to ensure that any payments due to it rank as highly as possible, as they then have the best chance of being paid.

“Provable debts” includes debts arising under a pre-administration contract (such as a continuing lease or a rent deposit deed) and contractual obligations (such as the obligation to pay rent or to top up a rent deposit).

Once the company had gone into administration, however, any fees, costs, charges and other expenses incurred in the course of the administration are payable in priority to those provable debts.

This Case

The dispute centred on a lease to LBEP of the London Pavilion, One Piccadilly in London, which houses the museum “Ripleys Believe It or Not!”. LBEP appointed administrators on 29 September 2017.

It was common ground between the parties that the property was retained for the benefit of the administration from the date that LBEP went into administration until the lease was forfeited on 27 December 2017 (the “Period”). The rent for the Period therefore fell due as an expense of the administration – meaning that it was payable in priority to unsecured provable debts.

The rent fell into arrears on 1 October 2017, and shortly afterwards the landlord drew down on the rent deposit held for that purpose. It then served notice on LBEP requiring it to top up the deposit, under the rent deposit deed. The top up was not paid, and the question arose as to whether the landlord would be restricted to proving for that debt, and therefore ranking alongside the other unsecured creditors.

The Decision

Judge Barber made the clear distinction between provable debts (which includes claims arising from pre administration contracts) and administration expenses (which prima facie exclude claims arising from pre administration contracts).

The rent payable under the pre-administration lease was prima facie provable, but once LBEP had gone into administration, rent incurred had to be treated as an expense of the administration rather than as a provable debt – because the administrators were using the property for the purposes of the administration, with liability accruing day to day, rather than under the contract and by reference to where the given rent days fall.

Take Away Points

In the current market, insolvency will remain a hot topic and so careful consideration needs to be given to the order of priority before a plan is actioned in relation to tenants in administration.

Whilst the Lundy Granite principle is not limited to rent, the judge firmly refused to allow the top up payment to be considered as an expense, meaning that the company effectively lost its priority in respect of those rent payments – a priority it would otherwise have been entitled to.

Perhaps the most important point from a practitioner’s perspective is the judge’s observation that “if that election was the result of bad advice … the landlord’s remedy is to bring a claim … for damages for professional negligence”.

Caution will therefore need to be exercised both in advising on and dealing with tenant administration in order to ensure that priority is not lost by taking ‘knee jerk’ action to mitigate losses. The longer game may become more important, as equity will not intervene to enable landlord clients to get the ‘best’ result.