When a commercial tenant collapses into insolvency, the options for a landlord looking to recover arrears of rent will usually be limited to pursuing an unsecured debt claim or else seeking to recoup what is owed by drawing on a rent deposit or calling in a guarantee.
However, as Sanjay Chandarana, property disputes lawyer with Ingram Winter Green Solicitors in London explains:
‘There is another option that may be available, and which can often be utilised where previously tenanted premises continue to be used for a purpose that is likely to be beneficial to the consequent administration or liquidation process. This alternative could result in you recovering all of the rent that is owed, and doing so in priority to many other creditors whose claims would otherwise rank above yours.’
To use this option, you must be able to show that the way the premises have been or are being used entitles you to claim your rent as an insolvency expense, both under the terms of the Insolvency Rules and what is known as the ‘Lundy Granite’ principle.
This alternative could result in you recovering all of the rent that is owed, and doing so in priority to many other creditors whose claims would otherwise rank above yours.
This can be a complex task and one that is best undertaken with the benefit of legal advice from a property litigator who is used to dealing with insolvency based unpaid rent claims.
Insolvency rules
Where an administrator or liquidator needs to incur essential liabilities in order to properly carry out their functions, then these liabilities will be classed as an insolvency expense which must be paid in priority to most other debts. This is extremely beneficial for creditors as it greatly increases their chances of being paid what they are owed in full – rather than receiving a proportionate dividend, if indeed anything at all.
To qualify as an insolvency expense, the liability in question must ordinarily arise after the appointment of the administrator or liquidator has taken place. Consequently, it does not usually extend to cover pre-existing liabilities, such as the obligation to pay rent under the terms of a lease agreed before the collapse of a tenant occurred.
However, there is an exception to the general rule which applies where a landlord can show that they meet the requirements of the Lundy Granite principle – so called after the 1871 case of Re Lundy Granite Co, ex p Heavan in which it was established.
The Lundy Granite principle
In simple terms, the Lundy Granite principle operates to enable debts owed to certain creditors to be paid in full as an insolvency expense, notwithstanding the fact that liability in respect of the debt occurred before the administrator or liquidator was appointed.
In the context of rent arrears, this means that where the principle applies it can be used to recover the rent owed despite the fact that the lease giving rise to the liability was entered into prior to insolvency. However, this is only the case where the administrator or liquidator has retained possession of the premises and has carried on the lease (even if only briefly) for purposes which are intended to benefit the administration or liquidation, e.g. by increasing the chances of the tenant’s business being sold on as a going concern.
The rationale for the principle is that if the administrator or liquidator has elected to retain occupation of the premises, with a view to achieving a better outcome than might otherwise have been achieved, then it is only fair that the landlord should not be disadvantaged by that decision and accordingly that they should be entitled to receive the rent that is due for the period during which beneficial occupation is retained.
Application of Lundy Granite where a rent deposit exists
Legal advice should be taken as soon as possible to determine whether the Lundy Granite principle is likely to apply and particularly where there is a rent deposit in place which could be used to cover what is owed. This is because, depending on how likely it is that a claim under the principle will succeed, you may be better off leaving the deposit alone.
For example, if you also have a dilapidations claim that needs to be settled and your chances of claiming the arrears of rent as an insolvency expense are high, then the best course of action may be for you to leave the rent deposit intact so that you have security for any sums you may need to expend to deal with the dilapidations and which the administrator or liquidator might not ultimately be in a position to pay.
Attempts to recover arrears from a rent deposit and to then claim a top up of the deposit as an insolvency expense are likely to be rejected. This is following the case of Re London Bridge Entertainment Partners LLP (In Administration) [2019] EWHC 2932 (Ch), where ICC Judge Barber held that such action would be incompatible with the rule against double proof which prevents a creditor from claiming two payments from an administrator or liquidator in respect of what is essentially the same debt – in this case, rent.
What counts as ‘beneficial’ use?
There is a range of circumstances in which it may be possible to argue that an administrator or liquidator has used premises for the benefit of the insolvency process that they have been appointed to oversee. This includes where they have elected to keep the premises open to enable the tenant’s business to continue to trade, whether that be in order to:
- facilitate a stock sale;
- dispose of unwanted furniture, equipment or fixtures; or
- attract would-be buyers prepared to take the business on as a going concern.
Will Covid-19 change anything?
With a lot of businesses closed due to local and national restrictions, there may be fewer premises which remain open under an administrator or liquidator’s control. However, these premises may still be used for purposes that can fairly be said to benefit the insolvency process. For example, where premises continue to be used for storage or to act as a base from where the tenant’s business can be wound down in an orderly manner.
Beneficial use may also be inferred where no steps are taken to hand the premises back and there is a clear intention for the premises to be reopened for trading purposes as soon as the Government allows – perhaps signaled through the retention and furloughing of staff – or to sell the business on and to assign the lease.
Contact us
For further information about your rights as a landlord where a tenant becomes insolvent, please contact Sanjay Chandarana in our litigation team on 0207 845 7447 or email sanjaychandarana@iwg.co.uk.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.