The Position After Re London Bridge Entertainment Partners LLP (In Administration)

In the recent case of Re London Bridge Entertainment Partners LLP (in administration) [2019] HHJ Barber held that where money has been withdrawn from a rent deposit fund by a landlord, which is held solely for the purpose of paying rent, the Lundy Granite principle does not extend to an obligation to ‘top up’ the rent deposit.

The Lundy Granite Principle

To understand the principle, it must first be established what an insolvency expense is deemed to be. In the course of his appointment and duties under his appointment, an insolvency practitioner will often be required to incur essential liabilities to third parties. These liabilities, or ‘insolvency expenses’ are paid out of any assets realised by the insolvency practitioner in the course of their appointment, in priority to any distributions to floating charge holders and any unsecured creditors. Under the Insolvency Rules (2016), Administration expenses include ‘expenses properly incurred by the administrator in performing the administrator’s functions’ (r3.51(2)(a)

The long established Lundy Granite Principle is an exception to the insolvency expenses rule. This principle allows for creditors in certain circumstances to recover debts such as rent arrears in full  as expenses of the liquidation or administration, in respect of leases or other contracts entered into before the liquidation or administration. This is despite the fact that the contract or lease was entered into prior to insolvency. This is limited in respect of leases however, to situations where the office holder has retained possession of the land and carried on the lease for the purposes of benefitting the liquidation or administration. Thus, under the principle, debts which arise from contracts entered into prior to a liquidation or administration whereby the contract was continued by the officeholder for the benefit of the insolvency can, and indeed should be proved and recovered as either liquidation or administration expenses.

Whilst the principle evolved in the context of liquidation proceedings, the rules relating to liquidation expenses were later adopted in relation to administration expenses, resulting in rent for the period of the beneficial occupation by the administrators being an expenses under the principle.

However, there are limitations to the extent to which the Lundy Granite Principle can be applied.

Re London Bridge Entertainment Partners LLP (in Administration) [2019] EWHC 2932 (Ch)

The dispute essentially centred around 2 main agreements entered into between London Bridge Partners LLP (“the Company”) and London Trocadero (2015) LLP (“the Landlord”), those being the lease dated 2 November 2007 (“the Lease”) and a rent deposit deed dated 2 November 2007 (“the Deposit Deed”).

The Lease included a basic rent of £1,750,000 per annum payable quarterly in advance, and under the Deposit Deed the Company paid the sum of £2,056,250 (“the Deposited Sum”) into a designated treasury deposit account.

The Deposit Deed at clause 3 provided that if the Company failed to comply with its rent obligations, one of which being the  payment of any rent due on the due date, the Landlord could withdraw such amount as was outstanding from the Deposited Sum to satisfy the rent obligations. Clause 5 of the Deposit Deed provided that, where it was necessary for the Landlord to withdraw from the Deposited Sum, the Company would pay within 14 days of written demand the amount in respect of which the Landlord has withdrawn from the Deposited Sum.

Administrators were appointed on 29 September 2017 and the rent, which fell due under the Lease on 1 October 2017 (being £512,981.09 plus VAT) was not paid. As such, and pursuant to clause 5 of the Deposit Deed, on or by 9 October 2017 the Landlord made a withdrawal from the Deposited Sum to settle the unpaid rent.

The Landlord served notice on the Company pursuant to clauses 3 and 5 of the Deposit Deed confirming that rent for the quarter beginning 1 October 2017 had been withdrawn and requiring that the Company replenish the Deposited Sum within 14 days. The Company failed to do so.

The Lease was forfeited by the Administrators on 22 December 2017.

It was common ground that that for the period 29 September 2017 until the forfeiture of the Lease, the property was retained for the benefit of the administration. It is also common ground that if rent for the period of the Administrators’ beneficial retention remained unpaid, it would have been payable as an expense of administration under the Lundy Granite Principle.

However, where this case differs from a number of previous cases considering the application of the Principle, is that that the rent for the period of the Administrators beneficial occupation was in fact paid, and was technically satisfied by the withdrawal from the Deposited Sum.

The Judgment

The issue considered by ICC Judge Barber, was whether by operation of the Lundy Granite Principle, the obligation under Clause 5 of the Deposit Deed to top up the Deposited Sum should be considered an insolvency expense.

ICC Judge Barber held that the Landlord failed to demonstrate why equity should dictate that the top-up liability be given expense status under the Lundy Granite Principle. Anyone seeking to have a pre-insolvency claim raised to expense status in the insolvency, must demonstrate why they should have such a priority over other creditors. It was not deemed enough to state only that the liability had accrued during the beneficial occupation by the office holder of the leased premises, the liability must have incurred as a result of an act which would have been for the benefit of the estate. This was deemed to be a happenstance of timing, nothing more. 

In effect, as the Landlord had already elected to withdraw from the Deposited Sum and paid the rent for the quarter beginning 1 October 2017 in full using the funds withdrawn, to allow for the top-up obligation to be deemed an expense would effectively result in the Administrators paying the rent twice. On this basis, the top up was deemed to be sought only to secure what was described as non-expense claims such as dilapidations. The non-expense claims in question were not considered by ICC Judge Barber to be referable to the period of the Administrators beneficial occupation.

On this basis, ICC Judge Barber considered that there was no basis for equity to intervene with the usual rules of priority in the administration. The enforcement of the topping up of the Deposited Sum would be contrary to the pari passu rule, and as such, the Lundy Granite Principle did not apply.

Practical Implications

It is evident that care must be exercised when considering the potential options for recovering rent in an administration. By adopting a pay first, ask questions later approach in relation to drawing on the deposit fund to pay rent instalments, Landlords are at risk of losing their priority ranking in the Administration in respect of the rent payment.

Expert Opinion

“Where Administrators retain the property for the benefit of the Administration, the Lundy Granite Principle could be applied, resulting in the unpaid rent being deemed an expense of the liquidation. By withdrawing from the rent deposit, this avenue will be closed for Landlords and will result in the only option in relation to obligation to top up the rent deposit being to claim as a debt as an unsecured creditor.” Andrew Walker - Partner