Overturning two significant recent decisions, the Court of Appeal has held that whenever a rent payment day falls, from the moment a company in administration beneficially retains property, it will ordinarily be liable to pay rent as an expense for the period of that beneficial retention.
This unanimous judgment in Pillar Denton Limited & others (1) Jervis, (2) Maddison and (3) Game Retail Ltd ( EWCA Civ 180) overthrows Goldacre (Offices) Limited v Nortel Networks UK Limited ( EWHC 3389 (Ch)) and Leisure (Norwich) II Ltd v Luminar Lava Ignite Limited ( EWHC 951 (Ch)).
On the day after the Game group of companies entered administration, £10 million of rent fell due. The administrators quickly closed approximately 300 stores, but continued trading from a number of other stores, which they subsequently sold to Game Retail Ltd. The rent went unpaid.
THE HIGH COURT DECISION
The key question the court had to address was whether part of the rent (which was payable in advance) could be treated as an expense in the context of administration.
Generally prior to Goldacre, an accommodation would be reached between office holders and landlords so that rent was paid for the period during which the premises were occupied for the benefit of the insolvency process. However, Goldacre and Luminar radically altered the position to an ‘all or nothing’ outcome, depending on the date of appointment, which was seen by the restructuring profession as unhelpful to the rescue culture.
Following Goldacre and Luminar, it became a common tactic for appointments of office holders to be made the day following the rent quarter day to avoid paying a full quarter’s rent and leaving the landlord in the position where his property was occupied and his only remedy to recover rent was to prove in the insolvency.
When Game was heard at first instance, the court was obliged to follow those decisions and in doing so reached the following decision:
- All rent which fell due while the administrators were occupying the properties for the benefit of the administration was an administration expense and payable in full (regardless of the duration and extent of the occupation) and
- The March quarter rent, payable the day before the appointment of the administrators but relating to the period after the appointment, was treated as a provable debt.
THE GAME CHANGER
Lord Justice Lewison, who gave the leading judgment in the Game appeal, sought to redress the balance. His approach was to go back to the starting point by revisiting Lundy Granite Co ex p Heavan ((1870-71) LR 6 CH App 462). In that case, it was held that if a company, for its own purposes and with the aim of maximising realisations, remains in possession of the property, ‘common sense and ordinary justice’ determine that the landlord must be paid full value for that period. This doctrine based in equity became known as the Lundy Granite principle or the salvage principle.
However, recent case law applying the salvage principle progressively removed it from its equitable origins, producing unjust outcomes which did not necessarily follow common sense. Lord Justice Lewison’s view was that as the salvage principle was founded in equity, equity should determine the payment of rent in insolvency and not common law. This being so, he held that while rent is a provable debt, the salvage principle can intervene in order that the full amount of the rent be paid for the company’s ‘beneficial retention’ of the premises as if it were an administration expense.
In summary, the conclusions which can be drawn from the Game appeal are:
- The office holder is to pay rent for the period during which he beneficially retains the property.
- The rent will accrue from day to day.
- Such rent is payable as if it were an expense of the administration or liquidation.
- The period during which rent is payable is a question of how long the company in administration/liquidation retains the premises for the benefit of the insolvency process and is not determined by reference to the date upon which the rent falls due.
What is ‘beneficial retention’?
Although the judgment refers to it, there is no express statement as to what constitutes ‘beneficial retention’. This therefore leaves us with some uncertainty as to when rent starts to become payable as an expense.
WILL THERE BE CLAWBACKS?
Since Goldacre, administrators have agreed with landlords to pay part of the rent or all of the rent if it was not possible to appoint after the quarter day. No doubt consideration will need to be given to the nature of such payments i.e. whether they were made as a ‘commercial accommodation’ or whether they were made pursuant to the law applicable at that time. The effect of Re Kleinwort Benson Limited v Lincoln City Council and other appeals ( 4 All ER 513) means that payments made as a result of a mistake of law (i.e., those falling into the latter category) could be vulnerable to a claim in restitution.
The decision appears to have been well-received by landlords and the restructuring community as recreating, what is generally perceived to be, the least worst solution. For the time being, it re-establishes a fair balance that allows administrators to achieve the purpose of administration irrespective of the timing of the appointment.