Howard Kennedy successfully acted for Henry Shinners and Nick Myers of Smith & Williamson, the Joint Administrators of London Bridge Entertainment Partners LLP (in Administration), defending a claim brought by the landlord of the iconic London Trocadero in Piccadilly Circus.
London Bridge Entertainment Partners operated Ripley's Believe it or Not! from the Trocadero, going into administration in September 2017.
The landlord withdrew a quarter's rent that was payable under the lease of the Trocadero from the rent deposit that it held. The landlord then took the position that the contractual obligation to top-up the rent deposit should be met and paid as an expense of the administration of London Bridge Entertainment Partners. The landlord's claim was that the contractual obligation fell within the "salvage" or "Lundy Granite" principle.
The High Court (ICC Judge Barber) rejected the landlord's claim and held that the Administrators had been correct to refuse the landlord's demand to top-up the deposit as an expense of the administration.
The Priority Waterfall
In the Supreme Court case of In Re Nortel GmbH  Lord Neuberger set out the order of priority for payment out of a company's assets in a liquidation or an administration, being:
- Fixed charge creditors
- Expenses of the insolvency proceedings
- Preferential creditors
- Floating charge creditors
- Unsecured provable debts
- Statutory interest
- Non-provable liabilities
In an insolvency situation it is extremely unlikely that there will be sufficient assets in the company in administration to pay all the creditors of the company, and so the higher up the priority waterfall a creditor's claim is, the more likely it is to be paid.
Prima facie, as a contract that was entered into before the commencement of the administration, rent under a lease would normally be an unsecured provable debt at level 5 of the priority waterfall.
The Salvage Principle
The salvage, or Lundy Granite, principle (set out in the case of In re Lundy Granite Co (1870-81)) provides that certain pre-administration contracts that would normally be at level 5 within the priority waterfall may be elevated to level 2 in the priority waterfall as an expense of the administration.
In relation to rent, the salvage principle will apply where the administrators of the company retain beneficial occupation of the property with the view to realising an advantage. In that case it is considered that the landlord should not be denied their entitlement to the full value of the property, and the rent during the period of beneficial occupation will be payable as an expense.
The salvage principle is of considerable advantage to landlords as it is significantly more likely that there will be sufficient funds to pay creditors at level 2 in the priority waterfall rather than at level 5.
Rule against Double Proof
The Administrators also took the position that the obligation to top-up the deposit would offend the rule against double proof (also known as the rule against double dividend). This rule confirms that an insolvent estate should not pay two dividends in respect of one underlying debt, to avoid a creditor obtaining a higher dividend than other creditors by entering into multiple contracts where there is in substance only one debt.
After London Bridge Entertainment Partners went into administration, the Administrators sought to assign the lease of the Trocadero to a third party for a premium in an attempt to realise maximum value for that asset for the creditors of the Company.
The Administrators did not manage to assign the lease, and the lease was forfeited to the landlord by consent in December 2017.
For the period up to the date of forfeiture of the lease it was not disputed that the rent that fell due would have been elevated to an expense of the administration under the salvage principle.
However the landlord elected to withdraw that rent from the rent deposit, and then make demand on the Administrators to top-up the deposit in accordance with the terms of the rent deposit deed. The landlord claimed that the obligation to top-up the deposit should be treated as an expense of the administration.
The Administrators position was that the rent was now paid by way of the landlord withdrawing from the deposit. The obligation to top-up the deposit was not an expense of the administration, as it was pursuant to a pre-administration contract. The obligation to top-up the deposit was in fact an obligation to provide security to the landlord, which should not be treated as an expense of the administration.
The Court held that landlord's claim for the Administrators to top-up the deposit offended the rule against double proof. The landlord had a standalone claim against the insolvent estate in relation to any breaches of tenant obligations that were secured under the rent deposit deed. The obligation to top-up the deposit was an obligation to provide security for the same claim, and were therefore relating to the same underlying debt.
The Court also held that although the salvage principle is not strictly limited to rent, it did not apply to an obligation to provide security to the landlord by way of top-up of the rent deposit.
The Court rejected the landlord's arguments that the reference to "full value" in In re Lundy Granite included the full bundle of rights and obligations contained within the lease and any ancillary documents such as a rent deposit deed.
Points to note
The Judgment (which can be viewed here) contains a comprehensive analysis of the cases that have shaped the salvage principle, and applied them to an unusual set of facts. The Court was unwilling to extend the well-established scope of the salvage principle to an obligation to top-up a rent deposit.
Landlords should note this case with interest and caution.
It may be tempting to immediately resort to a rent deposit when an insolvent tenant does not pay their rent. However if the landlord considers that it is possible that other sums (for example dilapidations upon termination of a lease) will be due to them, it may be more advantageous to leave the deposit untouched.
The landlord will then retain security for the dilapidations claim which will be a provable debt, whilst the unpaid rent will be recoverable as an expense of the administration of the tenant.
Howard Kennedy is delighted to have achieved such a good result for the Administrators in a very challenging case.