England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand London WC2A 2LL
		28 March 2012

HH JUDGE PELLING QC:

Introduction

1. This is the hearing of four applications by the applicants, who are landlords of four properties that were let to companies that are now all in administration, by which applications the applicants apply for

a. permission under Paragraph 43 of Schedule B1 to the Insolvency Act 1986 ("IA") to forfeit the leases of the properties; and

b. a direction under IA Paragraph 74 of Schedule B1 requiring the administrators to pay in full the rent under each lease that accrued due prior to the commencement of the administrations.

There is no dispute of fact that is material for the purpose of determining the applications. Shortly prior to the commencement of this hearing, the respondents (hereafter "the administrators") gave permission to the applicants (hereafter "the landlords") to forfeit the leases. That element of the application remains live only in relation to costs, which have not been agreed. I return to that issue in more detail at the end of this judgment.

The Factual Background.

2. Each of the companies in administration (hereafter "the companies") is a company within a group of companies known as the Lumina Group. The business of each of the companies was the operation of a nightclub. Until the companies entered administration, the Lumina Group was one of the largest operators of such venues in the United Kingdom.
3. The group started to experience financial difficulties in June 2011. Rent was due under each of the relevant leases quarterly in advance. In June and again in September 2011, the companies sought a variation of the leases so as to enable them to pay rent monthly. These requests were refused. On 28 October 2011 the companies were placed in administration. On 31 October 2011 the administrators confirmed an intention to trade the venues on until 1 January 2012 even though they were not in a position to pay rent. On 1 December 2011 the landlord sought permission from the administrators to forfeit the leases. This was necessary because IA Paragraph 43(4) of Schedule B1 precludes a landlord from exercising a right to forfeit a lease by peaceable re-entry other than with the consent of the administrator of the company tenant concerned or order of the court. On 2 December 2011 the administrators refused their consent.
4. It is not necessary that I set out the terms of the various leases in detail. Each lease contained an express proviso for re-entry in the event that rent due remained unpaid for a period of either 14 or 21 days after the due date. Rent was payable, as I have said, quarterly in advance on each quarter day. By the end of November, there was a quarter's rent outstanding for each property that had been outstanding for in excess of the relevant period. In each case bar one the sum was the quarter's rent that fell due for payment on 29 September 2011. In relation to one club, the sum outstanding represented service charges due on or before 29 September 2011. It follows and it is common ground that, but for IA Paragraph 43(4) of Schedule B1, the landlords would have been entitled to forfeit the leases.

5. On 11 February 2011 the administrators informed the landlords that the businesses operated by the companies had been sold to a newly-incorporated company called Ranimul 2 Ltd (hereafter "Ranimul"), a company incorporated on 5 December 2011 by the or some of the persons interested in the Lumina Group. The terms of the agreement between the administrators and Ranimul were confidential but, following limited disclosure pursuant to an order of the Registrar, this much is apparent:

a. Ranimul agreed to seek the landlord's consent to the assignment of the leases to Ranimul;

b. Ranimul would pay £50,000 for each of two of the leases and £74,075 for one of the others, making a total of £174,075. Each sum was payable severally on completion of the relevant assignment;

c. The administrators agreed that Ranimul could occupy the properties pending assignment for the purpose of enabling Ranimul to continue to operate the venues as nightclubs; and

d. Ranimul agreed to pay the administrators an amount equal to the quarterly rent and service charges for the period of their occupancy.

5. On 13 December 2011 the landlords' solicitors served Section 146 notices on the companies on the basis that by parting with possession without obtaining the licence of the landlords, the companies had acted in breach of covenant. Ranimul subsequently decided not to proceed in relation to one of the properties and in consequence on 23 December 2011 the administrators offered to surrender the lease relevant to that property.
6. By 13 December 2011 the landlords had identified a prospective tenant willing to take assignment of the existing leases or at any rate to lease the premises on similar terms to those that applied under the leases to the companies. The landlords offered the administrators £150,000 (to be set off against the sums otherwise due from the administrators to the landlords) if the administrators would agree to the assignment of the leases to the landlords' prospective tenant. The administrator did not accept that offer and it was withdrawn shortly before this hearing. The prospective tenants identified by the landlords remain willing to lease the properties but, in relation to one property, on terms that are now less advantageous than the terms of the existing lease. The landlords maintain that this adverse change could have been avoided if the permission to forfeit had been granted earlier than it was.

The Issues

7. As I have said, the substantive issue concerning forfeiture has now been resolved because the administrators have given permission to the landlords to forfeit the leases. The substantive issue that remains concerns outstanding rent.
8. As I have explained, the rent payable under the leases is payable quarterly in advance. The quarterly payments due on 29 September 2011 fell due for payment prior to the appointment of the administrators. The issue between the parties concerns whether in the events that have happened the administrators are under an obligation to pay the rent that accrued due on 29 September as an expense of the administration even though those sums became due prior to the administrators' appointment taking effect.
9. The landlord's case is that where a landlord seeks to forfeit a lease after an administration or liquidation has commenced and permission is refused, all the rent that is unpaid becomes payable irrespective of when it accrued due, if and to the extent it applies to a period of occupation by the administrators or liquidators concerned. The administrators submit that this is a heretical approach and the only rent that can become payable as an expense of the administration is rent falling due after (a) the administration has commenced and (b) the administrators have elected to retain the relevant property for the purposes of the administration or liquidation. They accept that the Apportionment Act 1870 is of no application to sums payable in advance and in consequence they accept that the whole of the sum due for the March quarter is payable as an administration expense even though permission to forfeit was given only a few days after the March quarter day.

The Statutory Framework

10. The Administration Code is now contained in IA Schedule B1 augmented by the Insolvency Rules 1986 ("IRs").
11. Insofar as is material, Schedule B1 provides:

"4. The administrator of a company must perform his functions as quickly and efficiently as is reasonably practicable."

"43 …

(4) A landlord may not exercise a right of forfeiture by peaceable re-entry in relation to premises let to the company except (a) with the consent of the administrator, or (b) with the permission of the court."

"74

(1) A creditor or member of a company in administration may apply to the court claiming that

(a) the administrator is acting or has acted so as unfairly to harm the interests of the applicant (whether alone or in common with some or all other members or creditors), or

(b) the administrator proposes to act in a way which would unfairly harm the interests of the applicant (whether alone or in common with some or all other members or creditors).

(2) A creditor or member of a company in administration may apply to the court claiming that the administrator is not performing his functions as quickly or as efficiently as is reasonably practicable.

(3) The court may

(a) grant relief;

(b) dismiss the application;

(c) adjourn the hearing conditionally or unconditionally;

(d) make an interim order;

(e) make any other order it thinks appropriate.

(4) In particular, an order under this paragraph may

(a) regulate the administrator's exercise of his functions;

(b) require the administrator to do or not do a specified thing;

(c) require a creditors' meeting to be held for a specified purpose;

(d) provide for the appointment of an administrator to cease to have effect;

(e) make consequential provision."

12. Insofar as is material IRs Rule 2.67 provides:

"(1) The expenses of the administration are payable in the following order of priority –

(a) expenses properly incurred by the administrator in performing his functions in the administration of the company;

(b) the cost of any security provided by the administrator in accordance with the Act or the Rules;

(c) where an administration order was made, the costs of the applicant and any person appearing on the hearing of the application and where the administrator was appointed otherwise than by order of the court, any costs and expenses of the appointer in connection with the making of the appointment and the costs and expenses incurred by any other person in giving notice of intention to appoint an administrator;

(d) any amount payable to a person employed or authorised, under chapter 5 of this part of the Rules, to assist in the preparation of a statement of affairs or statement of concurrence;

(e) any allowance made, by order of the court, towards costs on an application for release from the obligation to submit a statement of affairs or statement of concurrence;

(f) any necessary disbursements by the administrator in the course of the administration ...

(g) the remuneration or emoluments of any person who has been employed by the administrator to perform any services for the company, as required or authorised under the Act or the rules;

(h) the administrator's remuneration the basis of which has been fixed under Chapter 11 of this part of the rules and unpaid pre-administration costs approved under rule 2.67A;

(j) the amount of any corporation tax on chargeable gains accruing on the realisation of any asset of the company ..."

13. Insofar as is material, Section 2 of the Apportionment Act 1870 provides:

"All rents, annuities, dividends, and other periodical payments in the nature of income (whether reserved or made payable under an instrument in writing or otherwise) shall, like interest on money lent, be considered as accruing from day to day, and shall be apportionable in respect of time accordingly."

Discussion

14. The outcome of the issue I am now considering depends upon the applicability to the facts as I have summarised them of the principle referred to in the authorities variously as the "Lundy Granite" or "salvage" principle. In the course of the argument I was taken to a number of authorities decided at the end of the 19th and the beginning of the 20th century as demonstrating the scope and effect of this principle. When considering what these cases decide it is important to remember that in the 19th and early 20th century, it was usual for rent to be payable in arrears. If rent was to be payable in advance, such an intention was and indeed is required to be clearly expressly stated in the lease concerned. In common law, rent payable in arrears did not become payable until the end of the quarter or half year to which it related - see Clun's Case (1614) 10 Coke Rep 127a. This could work real injustice in certain particular circumstances and led eventually to the passing of Section 2 of the Apportionment Act 1870 under which rent that was payable in arrears was treated as accruing from day to day so that if for any reason the obligation to pay rent ceased before the due date, the sum due down to that date could be calculated and became payable. However, the Act is not applicable to rent payable in advance - Ellis v Rowbotham [1900] 1 QB 741. In that case rent was payable in advance on 10 December 1898. The next instalment was due on 10 March 1899. The landlord re-entered pursuant to a proviso for re-entry on 2 March 1899 and the tenant claimed to be entitled to avoid rent for the period between 2 and 10 March 1899. That argument was firmly rejected by the Court of Appeal. Smith LJ said simply that the 1870 Act could not apply to rent that had accrued due before the tenant went out of possession. Romer LJ agreed, saying that the Act was of no application to any sum that had accrued due before the happening of the event said to give rise to the need for apportionment.
15. The most recent and authoritative statement of the Lundy Granite principle is that made by Lord Hoffman in Re Toshoku Finance UK plc [2002] 1 WLR 671. That case was concerned with a liquidator rather than an administrator. However, in Goldacre (Offices) Ltd v Nortel Networks UK Ltd [2009] EWHC 3389 (Ch) [2010] Ch 455, HHJ Perle QC sitting as a judge of this court held that the principle I am now concerned with applied in exactly the same way in administration as it does in liquidation - see paragraph 27 of his judgment. It is common ground that this conclusion is correct. It would be wrong for me to arrive at a conclusion of law that is different from that of a judge of coordinate jurisdiction unless I am satisfied it was plainly wrong. With respect I am satisfied that Judge Perle's conclusion was plainly right.
16. The principles to be derived from Lord Hoffman's speech are as follows:

a. Rent that has accrued due down to the date relevant for proof is provable, as is rent due in the future - see IRs rr.12.3(1) and 13.12(1);

b. Debts including future debts that are provable are paid pari passu with all other debts in the same class - usually those due to unsecured creditors;

c. Liquidation expenses are incurred after liquidation has commenced and are normally not provable;

d. Exceptionally, a liquidator or administrator who retains property by refusing permission to forfeit for the purpose of the liquidation or the administration concerned will become liable to pay rent which becomes payable in priority to all other creditors as a liquidation or administration expense.

On a proper reading of Lord Hoffman's analysis, it does not support the proposition that the exception referred to in (d) above extends to debts that have already become due at the date of the commencement of the liquidation or administration concerned. This is apparent from a consideration of the authorities referred to by Lord Hoffman as establishing the principle that he is summarising. Re Progress Assurance Co ex parte Liverpool Exchange Co [1870] LR 9 Eq 370 was concerned with a property let to the insolvent company and rent that had fallen due for a period after the making of the winding-up order. Similarly, Re Lundy Granite Co ex parte Heavan [1871] LR 6 Ch App 462 was concerned with rent that had fallen due more than a year after the winding-up order had been made. Finally, Re Oak Pits Colliery Co [1882] 21 Ch D 322 was concerned with rent that had accrued since the commencement of the winding-up. In the course of giving the judgment of the Court of Appeal in Oak Pits (ante), Lindley LJ drew a clear distinction between cases concerning rent in arrears at the commencement of a winding-up and those cases where rent accrued due subsequently. In relation to the first of these categories Lindley LJ said that the landlords must prove the debt like any other creditor. This was so even where the liquidator had retained possession. It was only in relation to rent that had accrued after the commencement of the winding-up and where the liquidator had retained possession for the purposes of the winding-up that the landlord would be permitted to distrain for his rent - see page 330, second paragraph.

17. Mr Jourdan placed some reliance on the statement of general principle contained in Lindley LJ's judgment in Oaks Pits (ante) at page 331 where he said:

"When the liquidator retains the property for the purpose of advantageously disposing of it or when he continues to use it, the rent of it ought to be regarded as a debt contracted for the purpose of winding up the company and ought to be paid in full like any other debt or expense properly incurred by the liquidator for the same purpose, and in such a case it appears to us that the rent for the whole period during which the property is so retained or used ought to be paid in full without reference to the amount which could be realised by a distress. This was the view taken by James LJ in the case of Lundy Granite Co and by Fry J in Re Brown, Bayley & Dixon ex parte Roberts & Wright [1881] 18 Ch D 649, and Kay J in the present case."

In my judgment, however, these remarks must be read in the context to which I have referred. It was not being suggested that any part of any sum that had accrued due prior to the commencement of the liquidation was subject to the exceptional principle that I am now concerned with. This approach was precisely that adopted by Fry J in Brown, Bayley & Dixon (ante) where he remarks at page 652 that:

"... I draw the line at the commencement of the winding up; and I hold that all claims of creditors before that date should be dealt with upon the principle of equality ..."

18. In the end, the main authority relied upon by Mr Jourdan was Re Silkstone & Dodsworth Coal & Iron Co [1881] 17 Ch D 158 ("Silkstone"). That case concerned a mining lease where the rent was payable half-yearly in arrears. Rent became payable after presentation of the winding-up petition and a winding-up order was made after the rent became payable. The lease was subject to a proviso for re-entry. The landlords sought leave to destrain submitting that:

"... the entire rent which became due after the winding-up ought to be paid by the liquidator ..."

19. The liquidator submitted that:

"... for the rent due before winding-up, the lessor can only prove ... and that under the Apportionment Act 1870 the rent must be apportioned up to that time ... [and therefore the landlord could only] destrain for the proportion of the rent which became due after presentation of the petition for winding up."

20. Thus this case was not concerned with rent that became due before winding-up but rent which became due only after winding-up and the issue was how much if any of the rent referable to the period before winding-up commenced could be recovered by destraint. Fry J did not engage with the apportionment issue but instead held:

"... the lessors have this power: if rent remained unpaid for 30 days after the usual date for payment, they had a right to enter and stop the working as well as to destrain and accordingly, on 6 December, they gave notice to the liquidator demanding either payment of the arrears of rent or the stoppage of the works when the liquidator, considering it desirable to carry on the enterprise of which this colliery forms part, neither stopped nor paid the rent but continued working. That is, in my view, an election by the liquidator to continue in possession of the property and, if he continued in possession of the property, could only do so upon the terms of the lease, and it was only equitable if he keeps the lease as an asset of the company and for the purposes of the liquidation that he should satisfy those conditions upon which the asset remains his. In other words, he should pay the rent in full."

The obligation under the lease was to pay rent in arrears on the due date and the point being made was that the liquidator was to be required to comply strictly with all obligations that arose for performance after the liquidator had elected to continue in possession of the property as the price of being permitted to do so. The fact that some of the rent that became payable related to a period before the liquidator had so elected was immaterial because the obligation to pay did not arise until after the liquidator's election and was an obligation to pay in full. Fry J returned to this issue in his judgment in Re South Kensington Co-op Stores [1881] 17 Ch D 161 where the judge adopted the apportionment solution that had been contended for by the liquidator in Silkstone. The judge explained the distinction between the two cases in this way:

"This is not a case in which the landlord has endeavoured to enforce his right of re-entry. If he had done so and had come on that ground, it does not follow that my decision would have been the same as now and for this reason that in that case he will be seeking to exercise a legal right to determine the term and, if the company desired to hold an estate subject to a legal right, it may well be that I should have decided as I did recently in Silkstone that the company must satisfy the legal condition which precluded the legal rights from being exercised. I make that observation in order that it may not be supposed that I consider this case the same as I decided the other day."

The "legal right" here referred to was the right to re-enter and the "legal condition" referred to was the obligation to pay all the rent due on the due date.

21. I have set out at some length the basis of the decision in Silkstone because it is the main foundation of the landlord's case before me. However, in my judgment, it does not support the case they advance. As the Court of Appeal in Oak Pits (ante) held, Silkstone is authority only for the proposition that:

"As to rent accruing after commencement of the winding up: (1) If the liquidator has retained possession for the purposes of the winding up, or if he has used the property for carrying on the company's business, or has kept the property in order to sell it, or to do the best he can with it, the landlord will be allowed to destrain for rent which has become due since the winding up."

Thus Silkstone is of application only in relation to rent that accrues due after the commencement of the winding-up or administration and after the office holder has elected to retain possession for the purpose of the liquidation or administration. It is of no application where, as here, the rent in question accrued before the commencement of the administration. Apportionment has no role to play in relation to rent payable in advance for reasons that I have already identified. Thus that part of the rent that fell due prior to the commencement of the administration that is attributable to the period after the administrators had elected to retain the properties for the purposes of the administration is not recoverable as an administration expense. This approach is consistent with the reasoning in Silkstone because the obligation to pay the rent in issue did not arise during a period when the office holder was retaining the property for the purposes of the administration but arose prior to that date. There is nothing in Fry J's reasoning that supports the conclusion for which the landlords contend. Fry J's reasoning in Brown, Bayley & Dixon (ante) is to contrary effect.

22. In any event, it is arguable that Silkstone would not be decided in the same way today. At the time when Silkstone was decided, there was no statutory bar on the exercise of a right of re-entry under a lease to which a property had been let to a company in liquidation as there is now and as there is in relation to administration being the power contained in Paragraph 43 to Schedule B1. It is not necessary for me to decide this point in this case, however, and I do not.
23. The outcome of the issue I have to resolve depends upon the application of the fundamental distinction to be drawn between an obligation to pay rent that arises while the lease is being retained by a liquidator or administrator for the purposes of the insolvency procedure and an obligation that arises prior to the commencement of the insolvency process. In this case, since rent was in each case payable in advance and had fallen due for payment before the commencement of the administration, it is not recoverable as an administration expense.
24. This approach is consistent with the analysis of HHJ Perle QC in Goldacre (ante) with which I respectfully agree, although the point he was deciding was different from that which arises in this case. In Goldacre (ante) the issue was whether the whole amount of the rent payable in advance that fell due for payment while the lease was retained by the administrator should be paid as an administration expense even though the administrator vacated during the period covered by the payment. HHJ Perle QC concluded that it was, for the reasons he identified in paragraph 20 of his judgment, namely that:

"... a liquidator electing to hold leasehold premises can do so only on the terms and conditions contained in the lease, and that any liability incurred while the lease is being enjoyed or retained for the benefit of the liquidation is payable in full as a liquidation expense."

25. In summary, therefore, in my judgment the position is as follows:

a. Where rent is payable in advance and falls due for payment prior to the commencement of the liquidation or administration, then it is provable but not payable as a liquidation or administration expense even though the liquidator or administrator retains the property for the purposes of the liquidation or administration for the whole or part of the period for which the payment in advance was payable;

b. Where rent payable in advance becomes due during a period when the liquidator or administrator is retaining the property for the purposes of the liquidation or administration, then the whole sum is payable as a liquidation or administration expense even though the liquidator or administrator gives permission to forfeit or vacates before expiry of the period for which the payment in advance is due; and

c. Where rent is payable in arrears and accrues due during a period when the administrator or liquidator is retaining property for the purposes of the liquidation or administration, the liquidator or administrator will be liable to pay as an administration or liquidation expense at least the rent that accrues from day to day for so long as he or she retains possession of the premises for the purposes of the liquidation or administration. Whether the office holder will be liable to pay that part of the rent that has accrued in arrears that is referable to a period prior to the commencement of the administration or liquidation depends upon whether Silkstone is to be followed. That issue does not arise in this case.

In those circumstances and for those reasons I conclude that the landlords are not entitled to payment of the, or any part of the, rent that accrued due prior to the commencement of the administration.

The Costs Issue

26. It was submitted by Mr Jourdan that the principles that I ought to apply in order to resolve this issue are those identified in Brawley v Marczynski (No 2) [2003] 1 WLR 813. This was not disputed by Mr Zacaroli. The relevant principles are those set out in paragraph 18-21 of the judgment of Longmore LJ which are insofar as is material to the following effect:

"18 ... there is, in my judgment, no tradition in these matters of there being 'no order as to costs' merely because a dispute has been settled except as to costs. No doubt if it is truly impossible to say what the likely outcome would have been it is a possible order. But if one looks at the authorities referred to by Mr Shipley one finds that the position is much more precisely expressed. I refer firstly to R v Holderness Borough Council ex parte James Roberts Developments Ltd [1993] 5 Admin LR 470 [where] Butler-Sloss LJ said at 56-7:

'It is not the function of the courts to make decisions on academic issues of law where there is no dispute to resolve. I have great sympathy with a view as to the undesirability of deciding an important issue in a dispute which no longer exists for the purpose of determining who pays the costs of litigation which has otherwise come to an end. In this case however there are now considerable costs incurred on both sides and, with regret, I cannot see how the court can bar the parties from obtaining a decision as to who should pay those costs. The issue of costs alone may keep litigation alive ... The court is not in a position to assess the correct costs order without an evaluation of the prospects of success had the application for judicial review been heard and determined.'

19. In a dissenting judgment but on this point not substantially dissenting from Butler-Sloss LJ, Simon Brown LJ said at 52:

'I recognise, of course, that costs applications have to be entertained and resolved. But not, I would suggest, by litigating the case for all the world as if the substantive issues need to be resolved for their own sake. In my judgment an altogether broader approach should be adopted. One which enables the court in a comparatively short time to decide, and decide moreover without giving a fully reasoned judgment, into which general category of discontinuance the case falls.

….

21. For my part, I found most helpful the principles which Scott Baker J did use from the authority of R (Boxall) v Waltham Forest London Borough Council (unreported, 21 December 2000). He set out these principles as follows:

"(i) The court has power to make a costs order when the substantive proceedings have been resolved without a trial but the parties have not agreed about costs. (ii) It will ordinarily be irrelevant that the claimant is legally aided. (iii) The overriding objective is to do justice between the parties without incurring unnecessary court time and consequently additional cost. (iv) At each end of the spectrum there will be cases where it is obvious which side would have won had the substantive issues been fought to a conclusion. In between, the position will, in differing degrees, be less clear. How far the court will be prepared to look into the previously unresolved substantive issues will depend on the circumstances of the particular case, not least the amount of costs at stake and the conduct of the parties. (v) In the absence of a good reason to make any other order the fall back is to make no order as to costs. (vi) The court should take care to ensure that it does not discourage parties from settling judicial review proceedings for example by a local authority making a concession at an early stage."

27. The costs that have been incurred in this case and in relation to this issue by the parties are substantial. Thus this is one of those cases where an assessment of the likely outcome cannot be avoided.
28. The landlord's main point was that the administrator refused permission because they had hoped that an agreement could be reached concerning the assignment of the leases to Ranimul. The landlords' position is that the administrators either knew or ought to have known that there was never any realistic prospect of the landlords agreeing to such a course and that the administrators' continued refusal to agree to permit forfeiture, certainly once an acceptable replacement tenant had been identified by the landlords, was unacceptable pressure by the administrators.
29. On 13 December 2011 the landlords' solicitors wrote to the administrator's solicitors in these terms:

"The parting with occupation of the various properties is a breach of the various leases. We will be serving today, in respect of each lease, notices under Section 146 of the Law of Property Act 1925.

We anticipate that your clients will seek licence to assign the various leases to Ranimul. Whilst our client does not pre-judge any application for licence to assign that your clients may make and will deal with any such application, we do not see how any such application could be successful.

Ranimull [sic] is a newly incorporated company (5 December 2011). There are no filed accounts. If applications for licence to assign are made in these circumstances, our client will surely be acting reasonably in refusing any such application.

In particular we refer you to the following clauses in the various leases in respect of applications for licence to assign.

Norwich: Clause 3.9.2 requires that the landlord will not be unreasonably withholding consent if there are arrears of yearly rent and the landlord may require a guarantor or guarantors as a condition of giving any consent.

Clause 3.9.1.2 confirms that the lease cannot be assigned unless the assignor enters into an authorised guarantee agreement.

Maidstone Club: ...(reading to the words)... Clause 6.9.7 provides that a landlord may require as a condition of consent; that the outgoing tenant provides an authorised guarantee agreement, one or more third party guarantors.

Clause 6.9.8 permits the landlord to impose other reasonable conditions.

Maidstone Hotshots: Clauses 6.9.7 and 6.9.8 above are repeated.

Milton Keynes: Clause 3.13.7.1.2 provides that the Landlord will be reasonable in refusing consent if the proposed assignee is not of sufficient financial standing to enable it to comply with the tenants covenants in the lease.

Clause 3.13.7.2.4. permits the landlord to require an authorised guarantee agreement to be given by the outgoing tenant as a condition of consent.

Clause 3.13.7.2.5 permits the landlord to require payment of arrears as a condition of consent.

Clause 3.13.7.2.6.1 permits the landlord to require third party guarantors.

Furthermore, under the terms of the Milton Keynes lease, your clients are required to comply with the provisions of Clause 3.13.5 and serve an offer on our client under the pre-emption provisions.

Assuming your clients will not sign an authorised guarantee agreement, it appears to us that the leases are, especially, un-assignable.

Finally, as you are aware, we have issued application for permission to forfeit the leases. These applications will be heard in front of the registrar on 9 January 2012."

30. The landlords maintain that these points have never been answered the administrators, notwithstanding that they were repeated in the second witness statement of Mr Jeremy Stephen, the landlords' solicitor. In paragraph 3 of that statement Mr Stephen referred to an open offer made by the landlords on 18 January 2012 in these terms:

"On 18 January 2012, the X-Leisure Landlords made an open offer to the Respondents to settle these applications. A copy of the offer letter is attached. The principal terms are:

1. The Respondents will assign the leases of all four properties to We Are Dance Limited;

2. We Are Dance Limited will take the staff at all three trading sites under a TUPE transfer and will purchase the fixtures and stock;

3. The Respondents will pay to the X-Leisure Landlords all rents due under the lease from the date of administration until the date of assignment;

4. In consideration, the X-Leisure Landlords will pay to the Respondents the sum of £150,000."

At that stage We Are: Dance Ltd was prepared to take a lease of all four properties on the existing terms; see paragraph 26 of the witness statement. The primary obligation of applying for licence to assign rested on the companies and therefore on the administrators, not the proposed assignee. The administrator however chose to cede conduct of the process to Ranimul.

31. Nothing of significance happened between the end of January and mid-March 2012. There is a dispute as to who was responsible for that delay. However, in my judgment that debate is likely is an arid one for if Ranimul wanted to discuss their proposals with the landlords but the landlords would not make themselves available, then the remedy was to apply for licence to assign. In truth, there was no real pressure on the administrators to do so as long as Ranimul were willing to pay the rent as it fell due and no pressure on Ranimul to do so as long as the administrators were unwilling to grant permission to forfeit.
32. Eventually, in March what purported to be an application for licence to assign was sent by Ranimul to the landlords. This resulted in a response from Mr Stephen on behalf of the landlords on 15 March 2012 in these terms:

"1. The applications are incomplete and cannot be considered.

The applications for Norwich and Maidstone do not state the terms on which your clients would seek to take the lease, they merely set out a desire to 'work with' our client. Our client cannot proceed on this basis. This matter is approaching trial.

Your client must set out clearly and precisely the terms and concessions it is seeking in order to take an assignment of the leases. Without this information these applications cannot be considered.

Please supply this information forthwith."

33. The response is contained in an email dated 21 March 2012 and was to the following effect:

"Thank you for your email of 19 March below. I now have our clients' further instructions and can confirm the following (using your numbering):

1. The leases' assignments would be taken each in the name of a newly incorporated wholly owned subsidiary of The Lumina Group Ltd.

2. Our clients would ask for a 12-month rent-free period for Norwich and a six-month rent-free period for Maidstone. After expiry of these rent-free periods the rents for both would be adjusted to £100,000 per year plus 10 per cent of turnover, the turnover element being payable six-monthly in arrears.

3. On the basis that your clients would consent to the assignment of the Milton Keynes lease to our clients and waive their pre-emption right then (to the extent that such are not payable as expenses of the administration) our clients would be prepared to pay the rent arrears attributable to the Milton Keynes property only (this would be without prejudice to any rights your clients may have to claim rent arrears as an expense of the administration).

4. Any agreement with your clients would be subject to your clients waiving their right to take the surrender of the Milton Keynes lease.

5. The guarantee of The Lumina Group Ltd would be given for the Milton Keynes property only, subject to the agreement that this would be released (a) on lawful assignment of the lease or transfer of the tenant company and replacement by an alternative guarantor and (b) after the tenant company's annual accounts demonstrate three consecutive years of pre-tax profits equal to or greater than three times the current annual rent ..."

34. On 23 March 2012 the landlords' solicitors wrote to the administrators' solicitors refusing the applications both on grounds that the conditions proposed were unacceptable and on the basis that the proposed tenant was not acceptable, either. Although the reasons given were lengthy, it is necessary that I set them out in their entirety:

"The Condition Objection

Norwich

We refer you to clause 3.9 of the Norwich lease.

Clause 3.9.1.2 makes it clear that the property is not to be assigned unless the assignor shall have entered into an authorised guarantee agreement in favour of the landlord. LG does not propose to provide an authorised guarantee agreement.

Clause 3.9.2 entitles the landlord to withhold approval if there are arrears of rent. There are such arrears, as LG well knows, and there is no proposal to pay them. XL is not willing to give approval without payment of the arrears.

Further, LG is seeking to vary the rent payable under the lease to include an extended rent free period and a change in the rent payment terms to a reduced base ...(reading to the words)... rent £100,000 plus a turnover rent of 10% of turnover. XL is not prepared to agree to this reduction.

Maidstone

We refer you to clause 6.9.5 of the Maidstone lease. Refusal of any application for licence to assign is will be reasonable (for the purposes of section 19A of the Landlord and Tenant Act 1927) if the proposed assignee does not have annual profits before tax in the complete three financial years preceding the date of application exceeding an amount of 3 times the annual rent of the lease, shown by properly audited accounts.

Further, consent may be refused if the assignee does not have net assets worth 5 times the annual rent payable under the lease, shown by properly audited accounts.

Your client cannot satisfy these conditions, and consent is refused on that ground.

Further, LG is seeking to vary the rent payable under the lease to include an extended rent free period and a change in the rent payment terms to a reduced base rent of £100,000 plus a turnover rent of 10% of turnover. XL is not prepared to agree this reduction.

Milton Keynes

We refer you to clause 3.13 of the MK lease. Clause 3.13.5 states that there shall be no assignment without the tenant first serving a pre-emption notice in accordance with the terms of that clause. Your client's offer is predicated on XL waiving it's rights under that clause and not requiring a pre-emption notice to be served.

XL is not prepared to waive this right.

Further, clause 3.13.7.1.2 states that it will not be unreasonable for the landlord to refuse consent if, in the reasonable opinion of the landlord, the proposed assignee is not of sufficient financial standing to enable it to comply with the tenant covenants under the lease. Your client is a new company with few assets and only a projected balance sheet provided by way of proof of profitability. XL considers that LG is not of sufficient financial standing to comply with the tenant covenants under the lease.

The Tenant Objection

Your client is not acceptable to XL s as a tenant for the following reasons, each of which is an independent reason which, by itself, would justify refusal of consent.

1. The fact that it took possession of XLs' premises without seeking consent, in flagrant breach of the terms of the leases which it must have known about, then delayed for 3 months in making the application for licence to assign, even then failed to provide adequate information, and when it eventually did so, proposed unacceptable terms.

2. The damage caused to the Birmingham premises, and the failure to provide any proper reassurance that similar damage would not be caused to XLs' premises.

3. LG is not of sufficient financial standing ..."

35. This resulted in a letter from Lovells of 26 March 2012 which said simply:

"We refer to your letter to Sidley Austin LLP dated Friday, 23 March 2012 ...

In light of your clients' decision to refuse the applications for consent to assign made on our clients' behalf by The Luminar Group Limited, formally known as Ranimul 2 Limited ("Ranimul"), on 14 March ... our clients have been seeking to explore with Ranimul possible alternatives for them to acquire the business run from the properties by the companies in administration.

Unfortunately, it has not been possible for our clients to agree such an alternative arrangement with Ranimul and for that reason our clients hereby give to your clients this morning consent to forfeit the lease of the properties ..."

36. In those circumstances, the landlords submit that overall the conduct of the administrators was precisely that which the Court of Appeal in Re Atlantic Computer Systems plc [1992] Ch 505 was referring to at pages 539G to 540A when it said:

"The unsatisfactory feature of these proposals is that the contemplated negotiations will take place at the expense of the funders, in that the funders will be asked to agree to modify their existing proprietary rights in a negotiation in which they will not be able to rely on those rights. Their bargaining strength will be reduced to the prospect that, if agreement is not reached after an indefinite period, the administrators may give their consent under section 11. Or, presumably, Norwich and AIB could embark on a fresh application to the court. This cannot be an acceptable basis on which to conduct an administration. Norwich and AIB should not be compelled to leave their property in such an administration against their will. The prohibitions in section 11(3)(c) and (d) were not intended to be a means of strengthening an administrator's position if he should seek to negotiate a modification of the existing proprietary rights of the owner of the land or goods in question."

In essence, the landlords say that they wish to take possession in order to re-let their property to tenants of their choice willing to take the leases on the existing terms that prevail and the conduct of the administrators prevented that from happening or at any rate delayed it happening and prevented it happening in relation to all the properties on the then existing terms. The landlords maintain that they were right in the circumstances I have outlined to issue the application, are likely to have succeeded had it been fought to a conclusion and in consequence ought to recover their costs.

37. The administrators' submissions on this issue replicate those set out in paragraph 71 of Mr Zacaroli's skeleton submissions. He submits that following the decision of the Court of Appeal in Atlantic Computers (ante) the court was required to carry out a balancing exercise in deciding whether or not to give permission to forfeit. In support of his contention that the administrators would have been likely to succeed, he submits that the following are the centrally relevant factors:

a. The administrators stood to recover some £174,000 from the proposed assignees if agreement between the landlords and the proposed assignees could be arrived at;

b. Although the proprietary interests of the landlords were powerful factors, they had to be balanced against the fact that the landlords were entitled to recover the rent that accrued due during the period the property was retained by the administrators; and

c. The administrators were entitled to continue to refuse permission as long as there was a realistic prospect that the Company's asset position would benefit from so doing.

It was accepted on behalf of the administrators that the landlords had made clear that the conditions being insisted upon were unreasonable, but it was submitted that there remained a possibility that the landlords would change their position.

38. I remind myself that I am not now determining the application but evaluating the prospects of success had the application been determined on its merits. This involves adopting a somewhat broad merits-based approach to the issue. Adopting that approach, I consider that the landlords would probably have succeeded for the following reasons:

a. Their proprietary interests are interests that are entitled to be given great weight in the balancing exercise;

b. The notion that they would receive rent falling due during the period the administrators continued to refuse permission is unlikely to be able to provide a complete answer where the leases are relatively long, the landlords had prospective tenants willing to take leases on the existing terms and the administrators' proposed assignees were unable or unwilling to agree such terms or even indicate formally the terms that they were proposing;

c. The landlords had indicated from December 2011 an unwillingness to grant licence to assign to Ranimul for reasons that on their face were reasonable and which were never answered either properly or at all by the administrators or the proposed assignees.

d. The delay referred to in c above had as its effect the application of pressure that was in the circumstances unfair and disproportionate because, with the passage of time, the risk increased that the landlords' preferred assignees or new tenants would lose interest so as to force the landlords into a position where they were bound to accept as tenants companies they regarded as unacceptable on terms that they regarded as unacceptable.

39. In those circumstances and for those reasons, I conclude that the assignees must pay the landlords' costs of the application for permission to forfeit the lease.

Permission to Appeal

40. There is an application for permission to appeal in relation to the conclusions I have arrived at in relation to the Lundy Granite issue. It is said that it is an novel issue of law. So it is but that does not lead to the conclusion that permission to appeal ought to be granted if the point is not realistically arguable. I am not satisfied that this is a point which is realistically arguable for the reasons I have given in the substantive judgment. Accordingly, permission is refused.
41. However, there is an application for an extension of time in which to file an appellant's notice which will, if it is filed, have to include an application for permission to appeal to the Court of Appeal. I am content to extent time to 25 April 2012, not least because of the intervention of the Easter holiday.