Snapshot

The Court of Appeal’s judgment in Jervis v Pillar Denton Limited (Game Station) [2014] EWCA Civ 180 on 24 February 2014 has brought welcome clarity to when rent qualifies as an administration expense.

The Court of Appeal has ruled that:

  • an insolvency officeholder must pay rent for the period during which he retains possession of a property for the benefit of the insolvency; 
  • such rents are payable as an expense of the insolvency and will be treated as accruing from day to day; and 
  • the period for which rent is so payable is a question of fact and not determined by reference to whether rent days occur before, during or after the insolvency. 

This decision has overruled Goldacre (Offices) Limited v Nortel Networks UK Limited (in administration) and Leisure (Norwich) II Limited v Luminar Lava Ignite Limited).

We will be discussing the case and its commercial implications at our seminar on Tuesday, 4 March 2014 at 5–6pm. For further details and to register please see below.

Background

Historically, where a company entered into insolvency after the contractual rent had already fallen due, a landlord’s claim for rent ranked as an unsecured creditor claim in the insolvency. However, where the property was being used for the benefit of the insolvency e.g. so that the company could continue to trade for the benefit of the creditors, then under the so called Lundy Granite principle, the landlord’s claim was elevated to rank as an expense of the insolvency.

Where only part of the property was used for the benefit of the insolvency, the officeholder would pay rent relating only to that part as an insolvency expense. The remainder would rank as a provable debt. Similarly, where an officeholder vacated the property part way through a quarter, he would only pay the rent and other payments relating to the time he was using the property as an insolvency expense. This changed in 2009 when the High Court held in Goldacre that, where a company in administration:

  • continues to use all or part of its leasehold premises for the benefit of the administration; and 
  • rent payments fall due during such period of use, 

those rent payments were (in their totality) an administration expense. This was regardless of whether the administrator vacates the property mid way through a quarter or uses only part of the property.

Since Goldacre, the timing of administration appointments has affected how much rent landlords receive. Administrators could not apportion payments to take account of part occupation or early vacation. This led in some cases to officeholders paying more than the true benefit (as in Goldacre) but in others they would pay less and obtain a period of up to three months rent free (as in the case of Luminar).

The facts in Game Station

The administrators were appointed on 26 March 2012, the day after the March rent quarter day. The rent for that quarter, some £10 million, had not been paid. The business was sold shortly after with many of the stores continuing to trade. The effect of Goldacre and Luminar was that:

  • the March quarter rent, which fell due before the administrators’ appointment but related to the period after appointment, was an unsecured debt and no part of it ranked as an expense of the administration (regardless of the administrators’ use of the property); and 
  • all rent which fell due while the administrators were using the property for the benefit of the administration was an administration expense and payable in full. This was the case regardless of whether the administrators used only part of a property or vacated the property part way through the quarter. 

The landlords applied to court challenging this position. At first instance, the High Court had to decide in line with the decisions in Goldacre and Luminar. However, the judge gave permission to appeal.

The Court of appeal decision: rent on a pay as you go basis

The Court of Appeal has held that rent should be paid on a pay as you go basis for the period of beneficial retention of the property by the insolvency officeholder.

The decision is to be applauded:

Fairness: the decision is fair on the administration estate and on landlords. With a pay as you go approach, neither party unfairly loses out or enjoys a windfall.

Timing: the new ruling means that companies can enter into administration when it is appropriate to do so, and that the rent payment day will not dictate the timing of an administration. For example, where a couple more days would be beneficial to plan for an insolvency and therefore achieve a better return for creditors as a whole, this can now be achieved, without the consequence of having to pay a full quarter’s rent as an expense of the administration.

Clarity: both landlords and officeholders have greater (but perhaps not complete) clarity on rent liabilities in insolvency.