But is it GAME over?

Pillar Denton Ltd and Others v Jervis and Others [2014] EWCA Civ 180

Summary – What happened?

A group of the UK's largest landlords have successfully overturned previous High Court decisions that had allowed insolvent tenants to continue trading from their premises without paying rent. The landlords in this case, which involved the retailer GAME, have been allowed to recover £3,000,000 in outstanding rents from the period of the tenant's administration.

The Court of Appeal found that the administrator or liquidator must pay the rent for any period during which possession of the premises is retained for the benefit of the administration or liquidation. Crucially, rent is to be calculated on a day to day basis, and not by reference to rent periods or due dates.

This will be welcome news to landlords whose tenants enter insolvency or who have previously had claims for rent refused by administrators or liquidators. However, the decision will have significant effects, not only on the timing of future administrations and liquidations, but also on the relationships between landlords and insolvency practitioners.

The background – Why does it matter?

Payments of rent by insolvent companies have been governed for the past few years by two high profile cases: Goldacre (Offices) Ltd v Nortel Networks UK Ltd [2009] EWHC 3389 (Ch) and Leisure Norwich (II) Ltd v Luminar Lava Ignite Ltd [2012] EWHC 951.

The first of these two cases, for Goldacre, found that the full amount of rent that fell due whilst the premises were being used for the purpose of the administration was payable as an expense of the administration – even if those premises were vacated part way through that rent period. Because expenses of the administration rank as a priority, ahead of even the administrators' own fees, they are likely to be paid in full, unlike unsecured claims. Consequently it seemed at first to be very good news for landlords.

However, Goldacre was followed shortly by the logical flip-side of the coin in Luminar. In this case, the Court found that any rent falling due before the appointment of administrators must therefore be an unsecured debt, even if the administrators continued to use the premises during that rent period. The practical consequence was that, by timing the insolvency process carefully so that it commenced immediately after a rent day, insolvent tenants could benefit from a rent-free period with no risk of enforcement from the landlord.

In practice, this resulted in what Lord Justice Lewison described in the Game decision as "a very unsatisfactory state" where administrators and liquidators ended up paying either less or more than the true benefit of using the property.

Apportionment of rent and the salvage principle

This is an historic issue which goes back over many years of landlord and tenant law. In most modern leases, rent is payable in advance.

  • Solvent tenants Rent payable in advance is not apportionable. So if the lease ends part-way through a payment period, for example by forfeiture, the tenant remains responsible for payment of the full period, even if the landlord has terminated the lease part way through.  
  • Insolvent tenants The landlord of an insolvent tenant is entitled to submit a claim in the ultimate dissolution of its assets. This is known as "proving the debt", and can include both debts that were owed by the tenant before it entered insolvency, and sums that have not yet fallen due, such as future rent payments. Any dividends will be subject to a statutory adjustment to reflect early payment.

The separate but critical question of whether rent arising after the insolvency is payable as an expense of the insolvency or as an unsecured claim does not fall to the discretion of the Court according to the facts. Instead, the question is whether rent falls within the long-established "salvage principle". If it does, then it will be payable as an expense of the insolvency.

The "salvage principle" was established by the Victorian case of Re Lundy Granite Co ex parte Heavan (1870-187) LR 6 Ch App 462. In this case, the Court found that "common sense and ordinary justice" demand that a landlord should be paid the full value of the property whilst the insolvent company remains in possession of it. The key question before the Court in the Game case was therefore whether rent could fall within the salvage principle.

The facts

In this case, the insolvent company was the games retailer, Game. It had hundreds of stores throughout the UK, most of which were leased to Game Stores Group Limited. In a classic illustration of the impact of Goldacre and Luminar, Game went into administration on 26 March 2012, the day after the March quarter rent day.

On 1 April 2012, the administrators sold the business and its assets to a purchaser, which called itself Game Retail Ltd. The administrators gave the purchaser a licence to occupy many of the shops. They then made an application to Court for a decision on how they should deal with payments of rent, service charge and insurance premiums. The Court, recognising the huge importance of the application, found that it was bound to follow Goldacre and Luminar, but gave leave for the parties to take the decision to the higher Court of Appeal.

The issues

The landlords argued that rent should be payable as an expense of the administration. They relied upon the salvage principle, arguing that it had to apply as a matter of equity to enhance the statutory rules on the priority of debts in an insolvency. Non-insolvency rules prohibiting the apportionment of rent in advance were therefore irrelevant.

The counter argument, put forward by the purchaser of Game, was that the salvage principle applied only to rent that was payable in arrears. It did not apply where rents fell due in advance. Consequently there was no power for the Court to apportion the payment of rent, and no special power under the Insolvency Rules.

The decision

The Court of Appeal overturned both Goldacre and Luminar. It found that:

  • The salvage principle is an equitable principle, and whether it applies is not a matter of discretion. Rather it is a principle that informs the interpretations of the Insolvency Rules.  
  • The salvage principle is not confined to rent that is payable in arrears.  
  • The fact that a debt could be proved in an insolvency does not prevent it from being consistent with the salvage principle, nor prevent the salvage principle from operating.  
  • The salvage principle is likewise to be distinguished from the issue of apportionment. Just because a payment cannot be apportioned does not mean that the salvage principle cannot apply. Instead of referring to payment dates, the salvage principle operates to determine the period of liability by reference to the period for which the landlord's property was used for the benefit of the insolvent tenant.

The overall effect is that the salvage principle could allow a liability to be payable as an expense of the insolvency, even if that liability fell due before the commencement of the insolvency. Rent will therefore be payable whilst the administrator or liquidator retains possession of the property for the benefit of the insolvency, even if the occupation commences after the insolvency. Equally, liability will end with the beneficial possession, which could mean in practice that liability for rent will end before the administrator or liquidator actually gives up possession. In practice, the liquidator / administrator must make payments at the rate of the rent throughout any period during which he retains possession for the benefit of the insolvency, and that rent will be treated as accruing from day to day. Whether possession is "beneficial" will be a question of fact in each case.

Where payments fall due in advance whilst the administrator or liquidator is in possession, the Court confirmed that the correct approach to making payments will be a "wait and see" approach, to see what happens with the property in practice.

The implications: Is it really game over?

This is essentially a return to the pre-Goldacre status quo, where landlords should be able to recover rent for each day that the property is occupied for the purpose of the insolvency. It should close a loophole that was in danger of affecting business decisions and having unfair consequences for some parties.

However, the current decision will not be the end of the matter. First, Game has indicated that it may appeal further, to the Supreme Court, on the basis that it "strongly argued against the law being changed on legal and commercial grounds". In the meantime, there is still scope for argument over the actual period of possession, and whether an administrator or liquidator is in "beneficial" occupation or not. There are unresolved queries over other items, such as dilapidations payments and other obligations that were not mentioned specifically by the Court. And landlords may find themselves in a position where they are proving for a claim that is partially unsecured and partially payable as an administration expense.

The biggest implications are likely to be for the retail sector, where the benefits of continuing to trade are the highest. The decision may well mean that administrators and liquidators take a more cautious approach and close more stores at an earlier stage.

Our advice

This is a very important decision that will arise in many insolvencies. It will have substantial implications for landlords, tenants, insolvency practitioners and the purchasers of insolvent companies.

  • If you have a tenant that has been in an insolvency process and you have been refused payment of rent by an administrator or liquidator, it may be worth seeking advice to see whether you can recover any rent  
  • If you have a tenant that enters into an insolvency process, keep a very careful eye on how the property is being used, as this may solve any disputes over "beneficial occupation" at a later date  
  • Similarly, if you have acted on an administration or liquidation, it may be worth seeking advice on whether any of the landlords would have a valid claim