The Court of Appeal has decided that rent accruing during a period of administration should be treated as an expense of the administration, irrespective of the date on which it falls due for payment. Administration expenses are paid by administrators in priority to liabilities owed to holders of security.
The decision in Jervis v Pillar Denton Limited (Game Station) and others (the Game decision) overrules the position in Goldacre and Luminar, so that landlords receive rent as an expense during the period that an administrator uses leasehold premises for the benefit of the administration.
The Court of Appeal agrees that the principles laid down in Atlantic Computers, together with the 'salvage' principles in insolvency, encapsulate the right approach when an administrator retains leased property for the benefit of the administration.
Facts of the Game Station case
The Game Station case was heard in the Court of Appeal in February 2014. The administrators and landlords of various companies in the Game Station group sought directions regarding the treatment of rent due under the terms of five leases. The leases were chosen as samples from the many premises that had been occupied by the Game Station group (in particular Game Station Stores Group Limited).
In each case, the rental payments were payable in advance. Quarterly rental payments of around £10 million fell due on 25 March 2012, the day before the administrators were appointed. Under Goldacre and Luminar principles, the administration estate benefited from the use of the premises without having to pay rent.
The focus in the Game Station appeal was what, if any, part of the rental payments should be treated as expenses of the administration rather than provable debts.
The distinction is of course an important one. An expense of the administration would be paid in priority to unsecured debts and from the realisations of charged property. A provable unsecured debt, however, would rank behind secured creditors, preferential creditors and the expenses of the administration.
What has changed?
The relevant principles prior to Game Station were laid down in cases of Goldacre (Offices) Limited v Nortel Networks UK Limited [2010] Ch 455 and Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd (In Administration) [2012] 4 All ER 894. These required that:
- rent payable in advance that fell due for payment prior to the start of the administration period would be treated as a provable debt only; whereas
- rent payable in advance that falls due for payment during the period of administration when the administrator is retaining the property for the purposes of the administration is payable as an expense of the administration. This was the case, even if the premises were subsequently vacated prior to the end of the rental period, due to the fact that rent could not be apportioned under The Apportionment Act 1870; and
- rent payable in arrears which accrues during a period when premises were occupied for the purposes of an administration is treated as an expense of the administration.
The Goldacre and Luminar decisions have been overruled in Game Station.
The new principle requires an office holder to make payments at the rate of rent for the period during which any premises are occupied during the administration period. For the purposes of this calculation, the rent will be treated as accruing from day to day.
Why was change needed?
The Court of Appeal judges considered that the Goldacre and Luminar cases left the law in a very unsatisfactory state. The judges said that those cases did not properly distinguish between pre-insolvency debts which can be proved for in an administration as unsecured claims, and the court's discretionary right to apply the long established salvage principle, and the principles laid down in the landmark case Re Atlantic Computer Systems PLC. All of these principles give scope in equity and "ordinary justice" (as Judge Justice Lewison said) for certain expenses to be treated as if they had fallen due for payment during the administration and so should be prioritised for payment. In their opinion, it did not matter that the rent could not be apportioned at common law, under The Apportionment Act 1870.
It was felt that a better understanding of the salvage principle was captured in the earlier Lundy Granite case. The view in Lundy Granite was that a company which elects to occupy a property "for its own purposes and with a view to the realisation of the property to better advantage", is preventing the landlord from recovering its property and accordingly "common sense and ordinary justice" requires the court to ensure that the landlord receives the full value of the property. As Lord Justice Lewison said, you cannot have both "the penny and the bun".
In our view, the decision implies that to provide full value to the landlord, the payments under the lease are paid as expenses, not just the rent. This would include the apportioned service charge for the period that premises are used in the administration. The Game Station judgment looks at decisions from a number of cases concerning the payment of rates (which had taken place at a time when the liability for making such payments did not accrue day to day). Their view was that the rationale for categorising these periodic rating payments was the same as the Game Station rental payments.
Impact of the decision
- The Game Station decision takes the position back to what it should be. It provides clear, familiar and established direction to administrators who need to use premises to help achieve a better outcome for creditors as a whole.
- It makes it all the more important for administrators to take a considered decision as to whether remaining in occupation of leasehold properties during the administration will lead to increased recoveries worthy of paying accrued rent. It also helps to remove the need to make this decision under the time pressures that arise due to an impending quarter day.
- Arguably the new principle will lead to a fairer outcome for all creditors.
- To the extent there has been pressure on directors to continue trading to the point where rental payments have fallen due for payment and so drop to the status of unsecured provable debts, the decision helps to mitigate this.
- The impact on secured creditors arguably does not really change. As was the case under Goldacre and Luminar, if rent was payable in arrear then the administrator was required to pay the rent as an expense. If rent was payable in advance, then it could be a provable unsecured debt, depending on the timing of the Administrators appointment. The Game decision provides consistency in how these sums are determined, which is critical when a lender is faced with a borrower company with a number of leasehold premises.