The Court of Appeal has handed down judgment in the highly anticipated Game case and has overruled the controversial decisions of the High Court in Goldacre1 and Luminar2.
The decision has confirmed that where an administra- tor makes use of leasehold property for the purposes of an administration, the reserved rent is payable as an administration expense for the period during which the property is used, and will be treated as accruing from day to day for that purpose. This is true whether the rent is payable in arrears or in advance and the date upon which the rent becomes due and payable is irrelevant.
The issue on the appeal was the treatment of rent payable under a lease held by a corporate tenant that has entered administration. The appeal court was asked to determine when such rent is no more than a provable debt; and when it ranks as an expense of the administration.
Whether an expense incurred by a company in admin- istration is payable in priority to other creditors depends on whether it falls within the categories set out in the Insolvency Rules 19863. The decisions in Goldacre and Luminar decided that:
- if rent is payable in advance and falls due before the date of administration, then it is not payable as an expense of the administration, even if the property is used for the benefit of the administration during that rent period; and
- if the property is used for the benefit of the administration, rent falling due during the administration is payable as an expense of the administration whether or not the whole or part of the premises is used for whole or part of the rent period.
As rent was payable in advance, rather than in arrears, it was not possible for the rent to be apportioned under the Apportionment Act 1870. Consequently, if a quarter’s rent became due before the appointment of administrators, no part of that rent was payable as an expense of the administration.
Prior to these two decisions, it was generally accepted that the payment of rent on properties used during an administration was not an absolute requirement and that a balance would need to be achieved between the interests of the landlord and the interests of the creditors.4
The question in the current case arose in the context of the administration of the Game group of companies. One of the companies in the group was the tenant of many hundreds of leasehold retail properties from which the group traded. In relation to most of those properties rent was payable quarterly in advance on the usual quarter days. On 25 March 2012 approximately £10 million in rent became due under the various leases. It was not paid and the group entered administration on the following day. Some stores were closed down immediately; but trading continued in other stores which were included in a sale of the business and assets of the group to Game Retail Ltd (“GRL”), a new company which was not part of the Game group and which was one of the defendants in the action. Approximately £3 million of the March rent remained outstanding in respect of those stores. In reliance on the decisions in Goldacre and Luminar, the administrators refused to pay the rent which had fallen due before their appointment.
A consortium of landlords sought to challenge this by asking the Court of Appeal to overturn the decisions of Goldacre and Luminar.
In overturning Goldacre and Luminar, the Court of Appeal has decided that rent for what Lord Justice Lewison called the “period of beneficial retention” should be payable as an administration expense and apportioned on a “pay-as-you-go” basis, with payments falling due during that period being subject to a “wait-and-see” approach. The Court held that the “salvage principle”, developed in equity during the nineteenth century mainly in relation to distress cases (Lundy Granite5 in particular), which provided that a landlord should receive the full value of the property where the company in administration uses it for its own purposes, applied equally to non-distress cases.
Lord Justice Lewison noted that rent payments differ from other debts in an administration, as a landlord has the right to prove for rent that falls due both before and after the date of administration by virtue of r. 2.87 of the Insolvency Rules 1986. The question as to whether or not that debt should be payable as if it were an expense of the administration under the salvage principle depends on whether the tenant company is using the property for the benefit of the administration with no corresponding benefit to the landlord.
The Court held that the reasoning in Goldacre was wrong on the basis that just because rent is not appor- tionable under the Apportionment Act 1870 does not mean that the salvage principle is inapplicable, and that Luminar was incorrectly decided because the salvage principle is not mutually exclusive from the right to prove for a debt in an administration. The Court of Appeal confirmed that the salvage principle can take effect at any time and it is a question of fact what period the principle should cover, not to be determined merely by reference to the date on which payment falls due.
The Court of Appeal's decision was widely predicted as it removes what many felt was unsatisfactory position in the state of the law following Goldacre and Luminar. The ruling means that rent will now be charged on 'pay-as-you-go' principle, which pending any appeal, will see the end of the recent practice of administration appointments being timed to benefit from a rent free period. The decision appears to be an attempt to put landlords on an equal footing with suppliers of other goods and services used by a company while it trades in administration. The judgment clarifies the position and landlords will now know they will be paid the full rent for the property for the period it is used for the benefit of the insolvency.
The Court of Appeal refused permission for GRL to appeal, but it is understood that GRL is considering the possibility of an appeal to the Supreme Court directly and it will be interesting to see if the Supreme Court will be prepared to hear any further argument on the point.