The Court of Appeal has delivered its much anticipated decision in relation to the treatment of rent as an expense of an administration in the case of Pillar Denton Limited & Ors v Michael John Andrew Jervis & Ors  EWCA Civ 180.
The issue for the Court of Appeal to consider in this appeal was how rent payable under a lease held by a corporate tenant who enters administration should be treated. The questions being: when is rent no more than a provable debt; and when does rent rank as an expense of the administration?
Whether a liability (such as rent) incurred by a company in administration before the administration, or by the administrators after they have been appointed, is treated as an expense of the administration has a profound effect on whether or not such a liability might be repaid to the creditor. In essence, if the liability is treated as an expense of the administration it will likely be settled in full (depending of course on the funds available for distribution) but if the liability is treated as an unsecured debt, it is less likely to be paid in full, if at all. This of course is a concern for landlords where they have corporate tenants who have entered administration as, under the Insolvency Act 1986, landlords are unable to forfeit the lease of a company in administration without first obtaining the administrator’s consent or the permission of the court. This has the effect of allowing the company in administration to remain in occupation for a period of time without paying rent to the landlord.
The present matter concerned the administration of the Game group of companies (the “Game Group”). One of the companies within the Game Group, Game Stores Group Limited (“Game Stores”), was the tenant of a number of commercial leases from which the Game Group traded. Under the terms of these leases rent was payable in advance on the normal quarter days (25 March, 24 June, 29 September and 25 December). On 25 March 2012, approximately £10 million in rent fell due under the various leases. The rent was not paid and administrators were appointed over the Game Group (including Game Stores) the following day. Whilst some stores closed immediately, others continued to trade and were included in the subsequent sale by the administrators of the business of the Game Group (including Game Stores) to Game Retail Limited on 1 April 2012. For the purposes of the business sale, the administrators also granted Game Retail Limited licences to occupy a number, but not all, of the properties formerly occupied by Game Stores.
Subsequent to the sale of the Game Group, the issue arose as to whether part of an instalment of rent payable in advance can be treated as an expense in the context of insolvency. As such, the administrators applied to the High Court for directions relating to the priority (in the administration) of rent, service charges and insurance due under the terms of five sample leases where Game Stores was the tenant. One of the sample leases concerned a property which had never been occupied by Game Retail Limited but had been occupied by the administrators for a period of five days from 26 March 2012 so as to allow the administrators to remove the goods of Game Stores from the property.
First Instance Decision
The High Court was led by previous leading case law in this matter, being Goldacre (Offices) Ltd v Nortel Networks UK Ltd (In Administration)  EWHC 3389 (Ch)  Ch 455 (“Goldacre”) and Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd (In Administration)  EWHC 951 (Ch)  4 All E.R. 894 (“Luminar”). Goldacre and Luminar, at their heart, essentially follow the principle under the Apportionment Act 1870 which says that (in a non-insolvency situation) rent payable in advance cannot be apportioned. In the case of Luminar it was held that where a quarter’s rent payable in advance fell due prior to the commencement of administration, none of that rent is payable as an administration expense, even where the administrator retains the property; the rent would simply be provable as a debt in the administration. It was decided in Goldacre that where a quarter’s rent (payable in advance) falls due during a period where the property was being occupied for the purposes of administration, then the whole of the quarter’s rent was payable as an administration expense, even if the administrators were to give up occupation in the same quarter.
Following the decisions in the above cases, Mr Nicholas Lavender QC held that the rent and service charge payable on 25 March 2012 (i.e. prior to the appointment of the administrators) were not payable as expenses of the administration and that any sums in respect of rent, service charge and insurance falling due on or after 26 March 2012 (i.e. following the administrators’ appointment) at a time where the administrators were using the properties for the benefit of the administration will be payable in full as expenses of the administration even if the administrators were to cease using the properties before the period to which the rent or service charge relates. He also granted permission for the landlords to appeal his decision.
Arguments before the Court of Appeal
The basis of the landlords’ appeal was the argument that neither the common law nor the Apportionment Act 1870 was relevant to the issue in question, but that the “salvage principle” (or “Lundy Granite principle”) was applicable (i.e. if rent falls within this principle then it is an administration expense). The contrary argument was that the application of the “salvage principle” is crucially dependant on the date at which liability for rent falls due: apportionment can only apply to cases of rent or other periodical payments in arrears and that it cannot apply to instalments of rent payable in advance as the entire amount accrues on the rent due date. Further, there is no special rule applicable to cases of insolvency and there is no equitable power to apportion.
Judgment of the Court of Appeal
Following a detailed consideration of the basis and application of the “salvage principle” Lord Justice Lewison, giving the leading judgment, opined that just because rent payable in advance is not apportionable under the Apportionment Act 1870 does not automatically mean that the “salvage principle” does not apply. In its analysis of the principle, the Court of Appeal found that the “salvage principle” was founded on equitable grounds and not on the common law or statute. As such, Lewison LJ further noted at paragraph 80 of his judgment that the “…whole of the instalment of rent that falls due is a provable debt, so the tenant remains liable to pay it….the application of the salvage principle neither creates nor transfers and liability. What it does is treat part of a single liability as an insolvency expense, by requiring it to be paid in full”.
As such, the Court of Appeal overruled the decisions in Goldacre and Luminar and held that the administrator or liquidator (as the case may be) must make payments at the rate of the rent for the duration of any period which he retains possession of the demised property for the benefit of the winding up or administration (as the case may be). Further, rent is payable as an expense of the winding up or the administration (as applicable) for the period during which the property is used, and the rent is treated as accruing from day to day. The duration of the period is a question of fact and is not determined merely by reference to which rent days occur before, during or after that period.
Without doubt the previous decisions in Goldacre and Luminar influenced how and, more importantly, when a company would be put into administration. As noted by the Court of Appeal in its consideration of the appeal, a consequence of the previous case law was that it had become more common for companies to enter into administration following a quarter day thereby avoiding liability to pay the full rent even if the administrators subsequently retained possession of the leasehold property. Clearly, and as enunciated by Lewison LJ, the results of Goldacre and Luminar had “…left the law in a very unsatisfactory state”.
The Court of Appeal’s decision can, at the least, be welcomed due to the clarity and certainty it provides in relation to the treatment of rent as an expense of an administration (or, indeed, a liquidation). That said, the decision will of course have a significant impact on the conduct of administrations where a company has interests in leasehold property and it remains to be seen whether the decision will be appealed. Further, although the decision gives clarity to when rent should be paid as an expense of the administration or liquidation, there will likely be further argument in other cases arising out of when exactly an administrator or liquidator (as the case may be) “…retains possession of the demised property for the benefit of the winding up or administration.”
For further information please contact James Walton or the partner with whom you usually deal.