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Hogan Lovells Advise on Luminar Administration High Court Victory

05 April 2012

LONDON, 5 April 2012 - Hogan Lovells has advised Ernst & Young as administrators of the Luminar Group in successfully defending a High Court action relating to payment of rent as an administration expense. Judgment was passed on Wednesday 28 March in Leisure (Norwich) II Limited v Luminar Lava Ignite Limited (in administration). 

The decision is of great importance to the business rescue culture in the UK and has already attracted much press attention and industry comment.  The Court ruled that rent payable in advance prior to the appointment of administrators is not an expense of the administration and therefore ranks equally with the claims of other unsecured creditors, even if the administrators continue to use the property during the relevant rent period.

Had the outcome been different, many administrators would have found themselves facing a rental liability that the company in administration was unable to meet, thus forcing more companies into liquidation.  The impact on the administration of Game, for example, which appointed administrators last week reportedly owing landlords over £20 million in pre-appointment rents, could have been catastrophic.

In October 2011, administrators were appointed to various companies owned by nightclub operator Luminar Group.  Quarterly rents payable in advance in September were in arrears.  The administrators traded from the nightclubs and in December 2011 secured a sale of approximately 60 of the nightclubs.  X-Leisure, the landlord of the group at four of its nightclubs, contended that the rent falling due in September, prior to the administrators' appointment, was payable as an expense of the administration. 
 
Hogan Lovells argued on behalf of the administrators that the well-known judgment in Goldacre (Offices) Limited v Nortel Networks UK Limited, requiring administrators using leasehold property for the benefit of the administration to pay rent as an expense of the administration was inapplicable to advance rent falling due prior to their appointment and that such rent was not apportionable.  Accordingly, no further rent was payable by the administrators of Luminar Group.  The High Court confirmed that this was the correct interpretation of Goldacre.

The Hogan Lovells team advising the administrators on the Court case was led by real estate disputes partner Mathew Ditchburn and business restructuring and insolvency partner Joe Bannister, supported by senior associate Tim Reid.  Hogan Lovells' involvement builds on the firm's recent experience advising on other high profile retail and leisure administrations, including Threshers, Bon Marche and Peacocks.

Commenting on the ruling, Mathew said:

"This ruling provides welcome clarity regarding the law relating to payment of rent as an administration expense, confirming that pre-appointment rent is not an expense of the administration.

However, the current regime continues to present difficulties to all stakeholders in an administration.  From the administrators' perspective, the inability to apportion rent creates the risk of incurring a liability to pay the full amount of advance rent where property is not used for the entire rent period.  For landlords, it means that advance rent due prior to the appointment of an administrator is an unsecured debt, even if the administrators use the property for part of the rent period.

A "pay as you go" approach to rents may be the answer but this would require more co-operation between landlords and administrators, or the Goldacre ruling to be overturned by the Court of Appeal."

 
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