24 February 2014
[2014] EWCA Civ 180
Court of Appeal (Patten, Lewison and Sharp LJJ)

The fact that rent payable in advance had fallen due prior to the tenant company entering administration did not prevent that that rent being payable an expense of the liquidation of the tenant company under the salvage/Lundy Granite principle.  The amount of rent so payable was a question of fact.

The tenant company was the lessee of hundreds of retail premises.  It paid rent quarterly in advance.  It went into administration the day after £10 million rent had become due.  The issue, at first instance and on appeal, was whether that rent was no more than a provable debt or whether it was an expense in the administration. 

At first instance the judge held that the rent was only a provable debt.  He followed Goldacre v Nortel Networks [2010] Ch 455 and re Luminar Lava Ignite[2014] Ch 165.  Goldacre had decided that when rent payable in advance accrued during the administration the whole of that rent was payable as an expense of the administration whether or not the administrators actually used the property for the whole period for which the rent was due.  Luminar had decided the corollary: that where rent payable in advance had accrued before the start of the administration none of it was capable of being an expense of the administration even if the administrators retained possession for the purposes of the administration.

The Court of Appeal reviewed at length the authorities on which the salvage principle was based.  Lewison LJ (with whom Patton and Sharp LJJ agreed) held, overruling Goldacre and Luminar, that the Salvage or Lundy Graniteprinciple (i.e. the principle in re Lundy Granite Co; Ex p Heavan (1871) LR 6 Ch App 462) compelled the conclusion that where administrators (or other officer holders) retained possession of property for the purposes of the administration they were liable to pay the landlord the full value of the property during that period.  Since the principle was an equitable one, common law rules regarding the apportionment of rent did not apply.  The length of the period was a question of fact.

Where rent is payable in advance, an administrator should make payments at the rate of the rent for the duration of any period during which he retained possession for the benefit of the administration.  The rent should be treated as accruing from day to day and payments were then payable as an expense of the administration.  The duration of the period was a question of fact and was not to be determined by reference only to whether rent days occurred before, during or after that period. 

This case is a common sense clarification of the salvage principle in the modern insolvency context, when most rent is payable in advance, which will be warmly welcomed by many in the insolvency community.