Over the last few years, the courts have shown themselves to be increasingly unwilling to interfere in the level of liquidated damages set in building contracts. The courts have taken this position predominantly because the agreed level of liquidated damages forms part of the commercial bargain reached between the parties at the outset of the contract. However, employers should still carefully calculate the level of liquidated damages inserted into the contract for the following reasons:

As the prospects for business survival become ever tougher due to challenging economic conditions, administrators and liquidators are increasingly finding themselves having to justify to the courts whether or not costs should be treated as an expense of the administration or liquidation.

Sums incurred or paid as an expense of an administration or liquidation are, unlike debts incurred before the appointment of the administrator or liquidator, paid in preference to unsecured debts and also before the administrator or liquidator's fees and expenses.

For landlords, a tenant in administration is just about your worst nightmare. A moratorium prevents you from suing for outstanding arrears or forfeiting the lease and you may be left with an empty unit generating no income.  

Now it seems if administrators are using your premises, the rent might not even be paid as an expense simply because of when they were appointed. So what has happened?

Key points

• The High Court has ruled that, where a tenant goes into administration, rent which is payable in advance and falls due before the commencement of the administration is not recoverable by the landlord as an administration expense
• Landlords must take their place with other unsecured creditors in relation to sums payable before the appointment of administrators, even if they relate to a period during which the administrators had use of the property

Background

Just a short post to update our previous post on the issue of administrators being obliged to pay rent as an expense of the administration. 

Leisure Norwich (2) Ltd & Others v Luminar Lava Ignite Limited & Others - [2012] EWHC 951(Ch). Incurring liabilities to third parties is often necessary in order to carry out an effective administration of an insolvent company.

In our Law-Now of 4 April 2012 (click here for link), we reported on the decision of the court in the case of Leisure (Norwich) II Limited v Luminar Lava Ignite Limited (in administration).  The detailed judgment has now been released, setting out the rationale for the decision and summarising the position on rents in administration generally.

The legal position on this issue is now:

With the number of retail administrations up 15% in the first quarter of 2012 compared to a year ago (according to research by Deloitte), the recent High Court case of Leisure (Norwich) II Limited v Luminar Lava Ignite Limited (in administration) 28 March 2012 will be of particular interest to landlords.  They will not be pleased with the decision that unpaid rent which falls due prior to the appointment of an administrator/liquidator amounts to an unsecured claim against the insolvent tenant.  It is not to be treated as an expense of the administration/liquidation (and w

A High Court ruling in England today has provided a significant clarification of the law relating to payment of rent as an administration expense.

In Leisure (Norwich) II Limited v Luminar Lava Ignite Limited (in administration), the Court confirmed that rent payable in advance prior to the appointment of administrators is not payable as an expense of the administration, even if the administrators continue to use the property. This means that the rent would not be given priority over other unsecured debts.