UK: Rent As An Expense Of The Administration - Clarification By Court Of Appeal

Last Updated: 26 February 2014
Article by Alan Meek and Ian Bowie

In our e-updates of 20 January 2010 and 16 August 2010, we looked at decisions of the English and Scottish courts from December 2009 and August 2010 in which it was decided that, in England and Scotland respectively, the Administrators of a tenant company are bound to account to the landlord of premises for rent due in relation to the period during which those premises are being used in connection with the administration, and that the rent is to be paid as an expense of the administration. In other words, the landlord's claim for rent enjoys a high level of priority in the tenant's insolvency and the Administrators (and a court, if the matter ends up there) have no discretion in the matter.

The law created by those cases was unsatisfactory in that administrators appointed just after a rent payment date did not have to pay rent until the next rent payment date and, if they had vacated the premises by that subsequent date, the liability for rent on that subsequent date ranked merely as an ordinary claim and not as an expense.

Conversely, if the administrators remained in the premises as at a rent payment date, the rent which fell due and payable as at that date ranked as an expense for the full rent payment period (normally three months), even if the administrators vacated the premises shortly after that rent payment date.

The law established in England and Wales by those cases has now been changed by a significant decision of the Court of Appeal in the administration of Game Retail Limited, the game retailer, handed down on 24 February 2014. The Court has ruled that the correct approach is that rent is to be treated as an expense of the administration for each day during which the administrators retain possession of the premises for the benefit of the administration. The crucial significance of the timing of the rent payment dates has now been removed.

The Court of Appeal case has been welcomed by bodies like the British Property Federation whose members (property companies) had felt aggrieved by the operation of the law over the last few years as they alleged that the formal commencement of a number of major insolvencies had been timed to have the effect that the administrators were able to use the premises for a few weeks (or even months) effectively rent free. However, insolvency practitioners will also be pleased by the outcome as they were not satisfied with the arbitrary nature of the previous law. Indeed, the administrators in the Game case had co-operated with the consortium of landlords (who had brought the case) to enable the law to be re-assessed by the Court of Appeal.

The Game case is not binding on Scottish companies which go into administration. However, although the Court of Appeal applied principles from English common law, it is likely that a Scottish court would follow the outcome of the Game case, just as happened in the only previous Scottish case (which was the subject of our last e-update on this topic on 16 August 2010).

© MacRoberts 2014

Disclaimer

The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.

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