A “GAME” CHANGER? THE COURT OF APPEAL RULES ON THE TREATMENT OF RENT AS AN EXPENSE IN ADMINISTRATION

February 26, 2014

The Court of Appeal has recently handed down its judgment in the case of Pillar Denton Ltd & Ors v Jervis & Ors 2014 [EWCA] Civ 180, also known as the “Game case”.

In March 2012 the Game group of companies was placed into administration. One of the companies in the group was a tenant of a number of retail leasehold properties. Most of the leases for these properties provided that rent was payable quarterly in advance on the usual quarter days (i.e. 25 March, 24 June, 29 September 25 December). On 25 March 2012 over £10million in rent became due and payable to the various landlords. The group entered into administration on 26 March 2012.

Some of the stores were closed. In others, trading continued pending the sale of the business and assets to Game Retailer Ltd. Approximately £3million of the March rent remained outstanding to the landlords. The Landlords brought a claim against the administrators and Game Retailer Ltd, arguing that they had unfairly missed out on the £3million rental payments.

The date that rent becomes payable under a lease in administration cases has been the subject of judicial and professional scrutiny for years. Two High Court decisions had until recently provided the main authorities in relation to how advance rental payments should be dealt with:-
1) In the case of Goldacre (Offices) Ltd v Nortel Networks UK Ltd [2009] EWHC 3389 (Ch); [2011] Ch 455 HH Judge Purle QC held that if a quarter’s rent which was payable in advance became due during a period in which a company was in administration, then if the administrators were using the property for the purposes of the administration, the whole of that quarter’s rent was payable to the landlord. This would be the case even if the administrators did not retain possession of the property for the entirety of the rental period.

2) In Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd [2012] EWHC 951 (Ch); [2013] 3 WLR 1132, HH Judge Pelling QC followed the ratio from the Goldacre case and held that if a quarter’s rent payable in advance became due before the company entered administration, then no rent for that quarter would be payable as an administration expense. This would be the case even if the administrations retained possession of the property for the purposes of the administration for the entirety of the rental period. The Landlord’s remedy would be to submit a proof of debt in the administration for the unpaid rent.

It is clear to see how both Goldacre and Leisure led to a potentially unsatisfactory outcome for both landlords and administrators. If administrators were retaining possession of a property for the purposes of the administration for a limited time only during the rental period as considered in the Goldacre case, the full rental payment was payable as an administration expense, irrespective of the length of the actual possession period. On the other hand, and following the ratio from the Leisure case, companies could be placed into administration the day after the quarter’s advance rent became payable leading to many unsurprisingly disgruntled landlords claiming that they had lost out on rental payments for that period.

The landlords in the Game case were not successful in the High Court but were successful in their appeal. The COA overturned both the Goldacre and Leisure decisions and held that where an administrator (or liquidator) makes use of the leasehold property for the purposes of the administration (or liquidation) then rent is payable as an expense for the period the property is used. Applying the “salvage principal” which is founded in equity, the COA decided that in these cases rent should be treated as accruing from day to day, with the duration of the period to be determined as a question of fact.

The COA decision may be subject to further appeal to the House of Lords; however, in the interim it should provide greater clarity to both insolvency practitioners and landlords alike.

Caitriona Morgan is an Associate at Cleaver Fulton Rankin and works in the insolvency department, advising local and national insolvency practitioners and accountants, as well as individual debtors.

Should you require any further information on this article please contact our Mrs Caitriona Morgan on c.morgan@cfrlaw.co.uk or 028 9024 3141