UK: Pay As You Play - Court Of Appeal Overrules Goldacre And Luminar

Last Updated: 3 March 2014
Article by Roger Elford

The Court of Appeal has today handed down its eagerly awaited judgment in the matter of Pillar Denton Ltd & Ors v Jervis & ors [2014] (A2/2013/2005) ("Game"). The Administration of the retail computer company, Game Group, has created a substantial amount of litigation (not least the earlier Charles Russell case of Lazari v Game Retail (UK ) Limited [2012] on applications by landlords for leave to forfeit in administration cases).

Background

On the 1 July 2013 the High Court (Chancery Division) heard an application by administrators for directions and, when doing so, gave the respondent landlords permission to appeal to the Court of Appeal on the issue of the extent to which rent and service charges falling due both before and after the appointment of administrators were to be treated as expenses of the administration.

This was the question raised in the case of Goldacre (Offices) Ltd v Nortel Networks UK Ltd (In Administration) [2010] Ch. 455 ("Goldacre"), where the Court (feeling constrained by the House of Lords' ruling in Toshoku Finance UK Plc (In Liquidation), Re [2002] UKHL 6, [2002] 1 W.L.R. 671) ("Toshoku") held that where administrators were using the company's leasehold premises for the purposes of the administration, they were obliged to treat rents and other sums that fell due during that period as an expense of the administration, in full and without any apportionment to reflect the administrators' actual period of use. The administrators of Nortel had tried to pay only the rents for the part of the property the company still actually used. However the full extent of the property actually leased was very large and the court held that if the administrators were making use of any part of the property then the tenant administrator should pay rent for the whole (as an "expense" of the administration). Goldacre applied an 'adoption of contract' approach to rent as per Powdrill v Watson [1995].

This principle was then followed extended by the case Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd (In Administration) [2012] ("Luminar") which related to whether rent was payable as an expense for a period that fell due before Luminar entered administration. In the latest case the applicant administrators of the Game group applied to the court for directions, relating to the priority of the payment of rents and service charges (together with other charges falling due under the lease during the period of the administration). The Game Group was a high street retailer and through subsidiaries was the tenant of a number of stores. The rent was payable in advance on the usual quarter days. The administrators had been appointed the day after the quarterly rent fell due under a number of leases. The landlords under a number of sample leases were the respondents to that application.

Position under Goldacre and Luminar

Following Goldacre and Luminar Lava the position appeared to be that;

  1. Rent payable in advance cannot be apportioned under the Apportionment Act 1870 (unlike rent payable in arrears)
  2. where rent was payable in advance and fell due for payment prior to the commencement of the administration, then it was not payable as an administration expense even though the administrator retained the property for the purposes of the administration for the whole or part of the period for which the payment in advance was payable;
  3. however where rent payable in advance became due during a period when the administrator was retaining the property for the purposes of the administration, then the whole sum was payable as an administration expense even though the administrator vacated (or the landlord forfeited) before expiry of the period for which the payment in advance was due. Also the full rent was payable as an expense even if only part of the property was being used.

Issues at play in Game

In Game at first instance, the Game landlords were challenging the proposition that the rent and service charges that fell due the day before administrators' appointment was not an administration expense. The landlords argued that this created a highly unfair set of circumstances as an administrator can delay an administration to take effect for a day (or any short period) so that the administration commences just after a quarter day (or after any day when the rent falls due). On the basis of Luminar the administrator can thereby obtain use of a property without incurring any liability to pay the rent as an expense (the rent would be left as an unsecured debt without priority).

In the Game decision at first instance, it was held that the decisions in Goldacre and Luminar would be followed and it made directions to the effect that the quarterly rent and service charge which fell due immediately before the administration were not administration expenses, and that rent and service charge falling due following the administrators' appointment would be payable in full as an expense even if they thereafter ceased to use the premises. However, at the same time, Nicholas Lavender QC, gave leave to appeal so that the Court of Appeal could rule on the issues - on the basis that the matter was of concern to administrators and landlords generally and the amounts involved in the instant case were significant.

The case was finely balanced, particularly given the Supreme Court's ruling in the case of Re Nortel GmbH & Others [2013] UKSC 52 ("Nortel Pension Case"), where the Supreme Court was of the view that the House of Lords' decision in Toshoku should properly be limited to liabilities imposed by statute where Parliament had intended that liability to rank as an expense and should not have wider application to liabilities arising under contracts between 2 commercial parties.

Court of Appeal decision in Game

In its judgment today the Court of Appeal (LJ Lewison handing down the only reasoned judgment) allowed the appeal and overruled the Goldacre and Luminar decisions.

The important points to note from the Court of Appeal's decision in Game are as follows:

1. The decision imposes a "pay as you go" policy giving modern authority to the Lundy Granite /salvage principle in insolvency cases. "If rent is payable in arrears the office holder must pay rent as an expense of the liquidation/administration for the period during which he retains possession of the property for the benefit of the insolvency process. If necessary, that liability will be apportioned so as to reflect the true extent of the benefit. If rent is payable in advance no such apportionment is possible. In some cases, the office holder will pay more than the true benefit (as in Goldacre) and in some cases less (as in Luminar)".

2. Rent is to be treated as accruing on a "day to day basis" and is payable as an 'expense' for the duration of any period that an office holder retains possession of a demised premises for the benefit of the winding up or administration.

3. The basis upon which office holders are deemed to have incurred the liability for rent in the course of the winding up or administration is on equitable grounds and not on the application of common law thereby following Lord Hoffman's reasoning in Toshoku.

4. The Court of Appeal rejected the 'adoption principle' applied in Goldacre and stated that it does not apply to periodical payments such as rent.

Implications of Game decision

5. Whilst stopping administrators exploiting the tactical appointments of seeking to enter administration the day after quarter days, it may provide landlords with uncertainty as to how long they will have a tenant for – this makes planning difficult as an administrator could leave at any time.

6. The decision reinforces the need for early dialogue between landlords and officeholders.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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