UK: Game Changer: Payment Of Rent By Administrators

Summary and implications

An administrator who uses premises for the purpose of the administration must pay rent as an expense accruing on a daily basis: Game (Pillar Denton & ors v Jervis & ors [2014] EWCA Civ 180).  

Whether the liability for rent falls due before or after the date of the administration is irrelevant.

This means that administrators can no longer, tactically, put companies into administration just after a quarter day to avoid paying rent for that quarter as an expense while retaining occupation.

The principle should equally apply to other payments due under the lease where the premises are used for the benefit of the administration, such as service charges and insurance.

This decision should be welcomed by landlords and insolvency practitioners alike, creating a fair position for both. However, unsurprisingly, Game has now applied for leave to appeal to the Supreme Court, leaving the door of uncertainty open for possibly yet another match.

Treating rent as an administration expense

Liabilities arising under contracts entered into pre-administration are usually treated as a debt provable in the administration. These rank as an unsecured claim along with all other unsecured creditors.

In contrast, expenses are properly incurred by the administrator in performing his functions in the administration of the company. Clearly, an expense can only be incurred once the company is in administration.

The importance of this distinction is that expenses are paid in priority to all other claims except fixed charge debts. This may mean the difference between being paid or not, depending on the assets available.

Administrators maintained that any rent payable (usually quarterly) in advance, which fell due before the administration is a debt, not an expense, because it is not subject to apportionment (under the common law or statute): therefore the whole quarter's rent falls due on the quarter day. It was argued that no part of a quarter's rent which fell due pre-administration could be treated as an expense, even if the company went into administration during the quarter and then used the premises.

Win some, lose some – the pre-Game rules

The Game appeal was pursued by four landlords as a result of two earlier decisions: Goldacre (Goldacre (Offices) Limited v Nortel Networks UK Limited (in administration) [2009] EWHC 3389(Ch)) and Luminar (Leisure (Norwich) II Ltd & Others v Luminar Lava Ignite Ltd (in administration) [2012] EWHC 951 (Ch)). The outcomes of these two cases unintentionally left landlords in a very unsatisfactory position.

In Goldacre, the court held that rent was payable as an expense of the administration – good news so far for landlords.

The court also held that, as rent was payable quarterly in advance, the administrators, who had used a small part of the premises for a short period of time after the quarter day, were liable for the whole quarter's rent. Landlord: 1 Administrator: 0.

At the time, Goldacre was seen as a very positive outcome for landlords for obvious reason.

However, savvy administrators soon realised the upshot of this decision was that liability for the whole quarter's rent falling due pre-administration would be treated as a debt provable in the administration. Therefore, the administrator could avoid liability for the quarter's rent immediately preceding the administration as an expense, but retain occupation. A regular tactic then employed by administrators was to put companies into administration immediately after the quarter day.

That was precisely the position in Luminar, which followed fairly shortly after the Goldacre decision. There, the administrator put the company into administration just after the quarter day. As rent was payable quarterly in advance, the court held that none of the quarter's rent preceding the date of the administration was payable as an expense, despite the fact the administrator was using the premises. Administrator: 1 Landlord: 0.

Game on

The current appeal arose out of the Game administration. One of the companies in the group held hundreds of leasehold properties. The administrator placed the group, including the tenant company, into administration on 26 March 2012 – the day after the March quarter's rent fell due. The company's rental liability was about £10m. The administrator's clear intention was to have this sum treated as a debt in the administration. The group's business was sold to Game Retail Limited, the company who defended the appeal.

The key issue revolved around the question of whether part of an instalment of rent payable in advance could be treated as an expense in an insolvency situation.

Previously, the arguments had focused on the point that rent payable in advance is not apportionable, so pre-administration liability for rent could not be treated as an expense.

Here the landlords argued that the question of apportionment was irrelevant. They relied on what is known as the "salvage principle".

In essence, the salvage principle allows, on equitable grounds, liabilities incurred by a company in respect of property before the insolvency to be treated as an expense in the administration, if the property is retained by the administrator.

Landlords win the Game

Overruling the decisions in Goldacre and Luminar, the Court of Appeal unanimously found in favour of the landlords (based on the salvage principle):

  • The administrator (or other office holder) must pay rent for the period for which he retains possession of the property for the benefit of the administration.
  • Payment accrues due on a daily basis.
  • Payment of these sums is an expense of the administration.
  • The duration of the period is a question of fact, and is not determined by reference to when the rent falls due.

Conclusion

Interestingly, the administrators in Game maintained a neutral stance in the appeal, no doubt recognising that the landlords' arguments could also benefit administrations. Whilst there were winners and losers on both sides under the pre-Game rules, depending on how long the administrator needed to use the premises, this decision provides a common sense approach to treat rent as an expense for the period insolvency practitioners actually use the premises.

The fairness of this approach is even more stark when the circumstances, as here, were that the purchaser of the insolvent company's business was the party who actually enjoyed occupation of the property for most of the relevant period, and is presumably the party who will ultimately pay the disputed rent.

Some commentators have noted administrators may close premises early as a result of the decision, but the reality is they could only ever avoid rent as an expense for one quarter. The fact there is now a pay-as-you-go regime may in fact help administrators to keep the business trading longer. The administrator will not be trying to avoid a whole quarter's rent being treated as an expense if it trades beyond a quarter day. This in turn will, in some cases, provide a better outcome for landlords.

Given the sums at stake it is not surprising news that Game has now applied to the Supreme Court for leave to appeal. It may not be Game over just yet.

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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