What happens to funds held in escrow when the paying entity goes into administration?

The background

Escrow mechanisms are familiar territory for most practitioners. The case of Bristol Alliance Nominee No. 1 Ltd and others v Neil Andrew Bennett and others [2013] EWCA Civ 1626 explores what happens when funds are held in escrow at a time when the paying entity goes into administration.

The Court of Appeal has today handed down judgment in the hugely anticipated litigation involving the Game group of companies, deciding that, where a company goes into administration and continues to trade from property, rent will be payable on a daily basis for the period during which the company actually occupies the premises.

Landlords often ask for a rent deposit when they grant a new lease, or consent to an assignment, especially if the incoming tenant is of shaky covenant strength. This provides security against possible future default.

If a tenant becomes insolvent then this is exactly the sort of situation where a landlord would want to make use of a deposit. Where it is in the “commingling” form (i.e. paid to the landlord so that it becomes a debt in favour of the tenant) then that is unproblematic: no restrictions are imposed by the moratorium which arises on the tenant’s insolvency.

In the recent decision of Topland Portfolio No.1 Limited v Smiths News Trading Limited [2014] EWCA Civ 18, the Court of Appeal has given a timely reminder of the need for landlords to tread carefully when dealing with leases to ensure that a tenant guarantee remains effective.

The impending abolishment of the ancient common law self-help remedy of distress will affect landlords, tenants and insolvency practitioners.

What is Distress?

The ability of landlords to recover arrears of rent without going to Court, by instructing bailiffs to seize, impound and sell certain goods located at the premises and belonging to the tenant. This right will remain until 6 April 2014, but after that date distress will no longer be available and commercial landlords will instead have to rely on Commercial Rent Arrears Recovery (“CRAR”).

For landlords of commercial premises, one of their main concerns is making sure that the tenant pays all sums due under the lease. Unfortunately this doesn’t always happen so what are the options for recovering unpaid rent? This note summarises the different methods of enforcing payment of rent and looks at the advantages and disadvantages of each.

Considerations before you take action

Before commencing any enforcement action to recover rent arrears you should think about the following points:

Several blogs ago, I asked whether a party could still argue that the Notified Sum (as defined in the Housing Grants Construction Regeneration Act 1996, as amended by the Local Democracy, Economic Development and Construction Act 2009 - the Act) was not payable even in the absence of a Pay Less Notice.  To continue the theme of Pay Less Notices and their absence, what about the interplay between construction law and insolvency law - in the absence of a Pay Less Notice, and faced with a petition to the court to wind them up, could a party defend itself by saying that the so-called 'debt

According to The Times (25 October 2013) the British Property Federation has advised landlords to take larger rent deposits to reduce losses caused by the insolvency of a tenant.

Last month the Chancery Division of the High Court in Manchester considered a challenge to the continuing ap-pointment of LPA receivers in the case of (1) Jumani (2)Tariq v (1) Mortgage Express (2) Walker Singleton ([2013] EWHC 1571 (Ch)).

The UK High Court today took a crucial step towards resolving the difficult issue of when administrators must pay rent.