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Game Changed the Rules

This year has seen the Court of Appeal re-write the rules regarding the liability of companies in administration to pay rent whilst premises are used for administration purposes, reports Simon Hartley.

On 24 February 2014 the High Court’s controversial decisions in Goldacre (Offices) Ltd v Nortel Networks UK Ltd [2009] EWHC 3389 and Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd [2012] EWHC 951 were overruled by the Court of Appeal in Pillar Denton Limited v Michael John Jervis [2014] EWHC Civ. 180, which concerned the Game retail company group.

The Court of Appeal confirmed that where a company goes into administration and continues to trade from its premises rent will be payable on a daily basis for the period during which the company occupies the property as an expense of the administration. This is irrespective of when the rent falls due and how it is payable under the terms of the particular lease.

Prior to the Game decision, where rent payable in advance fell due whilst an administrator retained premises for administration purposes the whole sum due for the rental period was payable as an administration expense. Where rent fell due before the appointment of an administrator it was only payable further down the priority list as an unsecured debt.

Legislation provides that various expenses of an administration (set out in regulation 2.67(1) of the Insolvency Rules 1986) are payable before a company’s preferential debts, its debts secured by floating charges and sums due to unsecured creditors. It, therefore, benefits landlords to have rent treated as an administration expense since, inherently, there will be insufficient assets to meet all claims against the company.

Goldacre and Luminar led insolvency practitioners to think strategically regarding the timing of a company’s entry into administration. Appointments were often made on the day after a traditional quarter day in order to avoid rent falling due as an expense of administration for the first three months of the administration. Landlords often found themselves without any claim for rent as an administration expense as administrators are appointed after a rental payment date and vacated the premises before the next payment was due. Some companies were able to trade for a substantial period whilst effectively avoiding their rent obligations. This led some landlords, primarily in the retail sector, to support the move towards monthly rather than quarterly rents.

The Game case involved a pre-packaged business sale to Game Retail Limited. The new company traded from half the insolvent retailers’ stores under a licence to occupy granted by the tenant in administration. The issue raised by a consortium of Game’s landlords was whether rent should be paid as an administration expense for the period from the start of the administration to the following quarter day.

The Court of Appeal decided that Goldacre and Luminar misapplied the equitable ‘salvage’ principle and had "left the law in a very unsatisfactory state". The salvage principle was established in Re Lundy Granite Co, ex parte Heavan (1871) LR 6 Ch App 462, which concerned the expenses of liquidation. Lundy Granite held that liquidators were liable to pay rent as an expense when they made use of leasehold property for the liquidation’s benefit. The House of Lords considered the principle in Re Toshoku Finance UK plc (in administration) [2002] UKHL 6. They concluded that it did not involve the exercise of discretion. Similar situations arise in relation to administration, when premises are retained to assist with the realisation of assets or in finding a purchaser for the business.

Tenant companies must now pay rent for the period they remain in occupation for the benefit of the administration as an administration expense. The length of that period is a question of fact and the rent due shall be treated as accruing from day to day. February’s decision took the rules back to the practice adopted before Goldacre, which was based on the apportionment principles set down in Re Atlantic Computer Systems plc (No 2) [1990] BCC 454.

Many landlords celebrated the decision, as did the British Property Federation. Some insolvency practitioners also welcomed Game. The retailer’s administrators did not actively oppose the appeal. Arguably, the revised rules provide administrators with greater flexibility in the use of a company’s property. Following Goldacre some administrators found they had to cease trading in order to vacant premises before to the next rental payment date.

An initial request to refer the decision to the Supreme Court was refused by the Court of Appeal but an application for leave was made. This Game’s final round may not have been played yet.

Simon Hartley is a partner in RadcliffesLeBrasseur’s Real Estate Litigation department with expertise in acting for landlords, tenants and insolvency practitioners in relation to property disputes in an insolvency context.

Simon Hartley
t: 020 7227 7476
© RadcliffesLeBrasseur
June 2014