Following the Court of Appeal’s decision in Game it is necessary to consider the effect of the court’s decision on the treatment of rents in administration and by analogy liquidation – and the potential consequences of that change.

What types of insolvency does the decision affect?

The Court of Appeal’s decision explicitly states that it is applicable as to the treatment of rents in both administration and liquidation.

What about existing cases?

Game overrules the prior cases and states the law as it has always been.

It follows that landlords who have not been paid for use of a property may take the opportunity to contact administrators/liquidators to seek payment.

This may cause difficulty where a case has been closed and the administrators are no longer in office – although if a landlord has proved for its debt then it will not be able to reopen the position.

From the perspective of administrators/liquidators it is prudent to make provision for impending claims where possible – however it should be noted that Game may be subject to an appeal to the Supreme Court.

It is also possible that Parliament may enact legislation to stop retrospective effect.

When does a company in administration retain possession of a property for benefit of the administration or winding up?

The basic principle to be applied by the court is taken from Re Toshoku Finance Limited [2002] UKHL 6 (“Toshoku”) and is that “It is not sufficient that the liquidators retained possession for the benefit of the estate if it was also for the benefit of the landlord. Not offering to surrender or simply doing nothing was not regarded as retaining possession for the benefit of the estate”.

However: “if the company for its own purposes, and with a view to the realisation of the property to better advantage, remains in possession of the estate, which the lessor is therefore not able to obtain possession of, common sense and ordinary justice require the court to see that the landlord receives the full value of the property”.

It follows that simply holding a property will not class as retaining possession – although it would always be prudent to offer a property back to a landlord if it is not required for the purposes of an administration, or to disclaim the lease in a liquidation.

Using a property for trade – or allowing a third party to do so – will almost invariably class as retaining possession.

Leaving stock at a premises can be seen as retaining possession, although there may be scope to argue this point if the stock in question is not required. Game considers and approves the reasoning of Lord Hoffman in Re ABC Coupler and Engineering Co (No.3) [1970] 1 WLR 702, in which the Official Receiver left plant and machinery at a property from appointment on 7 June 1962 until the lease was surrendered on 19 November 1962 following the  sale of the plant and machinery. The court found that rent should be paid for the period during which the property was retained for the benefit of the winding up. On the facts the Official Receiver was not able to obtain leave to sell the assets and advice as to the best method of doing so until late July. The court therefore found that the property was not held for the benefit of the winding up until the Official Receiver began to take steps to realise the assets.

Any situation of this nature is likely to turn on the facts, and it is prudent to discuss any proposal with landlords, although now the cost, at least in terms of rent, of disposal, is potentially reduced.

In Goldacre (Offices) Ltd v Nortel Networks UK Ltd [2009] EWHC 3389 (Ch) (“Goldacre”) it was held that the tenant company was responsible for the whole of the passing rent even though in fact only a small part of the property was occupied.

The Court of Appeal in Game has clarified that it is possible at common law for liability for rent to be apportioned based on occupation of part – however the case law which was examined dealt with situations where a lease had been assigned or sublet.

There will be many cases where a landlord will properly be able to claim that it cannot have the benefit of its property if it is occupied even if only in part – if the use of one room, for example, means that a landlord is not free to re-let the property as a whole, then it would appear that the landlord would be entitled to recover the rent for the whole. This is unaltered by the Court of Appeal’s decision in Game.

When does rent need to be paid?

Prior to the decision of the Court of Appeal in Game the position was that an instalment of rent falling due during a period of occupation was payable in full as an administration expense on the relevant payment date.

Game endorses a ‘wait and see’ approach as adopted by Kekewich J in Shackell & Co v Chorlton & Sons [1895] 1 Ch 378. The effect of this is that the amount of rent payable depends on the period of beneficial occupation – and cannot therefore be determined until that period has ceased.

This will not prevent landlords from seeking instalment payments of rent as a period of beneficial occupation progresses, but does give administrators and liquidators scope to reach a negotiated arrangement with landlords in this respect. It is suggested that it would be sensible to seek to agree periodic payments in arrear to avoid paying over money which might not ultimately be due as an expense.

Does a company in administration benefit from any rental concession or rent free period granted to the company prior to its administration?

This will depend on how the concession or rent free period has been documented. Lord Justice Lewison stated in Game that “Where the property is held under the terms of a lease the full value will be taken to be the rate of rent reserved by the lease”. It follows that if the rate of rent reserved is nil – or discounted – for a particular period, then that is the rate applicable – as that is the rate which would otherwise be payable to the landlord.

The position is less clear where a concession or rent free period has been granted informally or apart from the lease and it would be necessary to consider the individual circumstances of a case.

What about sums other than the annual rent?

It is common for sums other than the annual rent under a lease to be reserved and payable as a rent. Whilst Game does not touch on such payments there does not appear to be any reason why periodic payments of sums other than annual rent, but which are reserved as rent (for example insurance rent and service charge) should be treated in any different manner from annual rents.

It is sometimes the case that liability for dilapidations – or at least the landlord’s costs of remedying dilapidations (breaches of a repairing covenant) – are reserved as rent. Whilst a repairing covenant is an ongoing obligation it is crystallised by service of a repairing notice – generally accompanied by a schedule of dilapidations. This can be done either at the end of the term or (in most cases) during the term. There is little case law on the subject (and it is not touched on in Game). Goldacre cited the 1919 case of Re Levi & Co Ltd. [1919] 1Ch 416 in which a liquidator was held liable to pay the costs of a landlord’s terminal dilapidation as a liquidation expense. However in that case the liquidators had retained the property in order to benefit from a large rental profit from undertenants in situ. This case is cited in practitioner texts as authority for the proposition that dilapidations claims can be recoverable as  an expense but it should be noted that the point has not been considered in more recent cases in any detail. If a property is likely to be used extensively in an administration or liquidation it may be prudent, if it is cost effective to do so, to consider instructing surveyors to take a schedule of the condition of a property on appointment in order to protect against any claim that historic dilapidations have occurred during a period where a property is being used in the administration.