Michael John Andrew Jervis v Pillar Denton Limited (Game Station) and others [2013] EWHC 2171 (Ch) (“Game”)

Game has come to the courts against the background of two previous High Court decisions on the treatment of lease rents in administration. Recent decisions on this point have arisen out of cases where landlords made claims for rent in the administration of tenant companies.

Prior to Game (and notably following the decisions of the High Court in Goldacre (Offices) Ltd v Nortel Networks UK Ltd [2009] EWHC 3389 (Ch) (“Goldacre”) and Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd [2012] EWHC 951 (Ch) (“Luminar”) the position was that:

  • Where rent payable in advance became due during a period when the liquidator or administrator was retaining the property for the purposes of the liquidation or administration, then the whole sum was payable as a liquidation or administration expense regardless of whether the property remained occupied to the end of the period.
  • The court had no discretion to consider how much it would be fair for the administrators to pay in this case.
  • Where rent was payable in advance and fell due for payment prior to the commencement of the administration, then it was provable but not payable as an administration expense even though the administrator retained the property for the purposes of the liquidation or administration for the whole or part of the period.
  • Where rent was payable in arrears and accrued due during a period when the administrator or liquidator was retaining property for the purposes of the liquidation or administration, the liquidator or administrator would be liable to pay as an administration or liquidation expense at least the rent that accrued from day to day for so long as he or she retained possession of the premises for the purposes of the liquidation or administration.

The consequence of the cases giving rise to this position has been that it has become more common for companies to enter administration on the day immediately following a quarter day, thus avoiding liability to pay the rent in full even if they retain possession.

From the perspective of landlords, this is often exacerbated by a swift sale to a new company which then takes advantage of an effective rent free period to which the landlord has not consented.

The Court of Appeal considered this position in a two day hearing on 12 and 13 February and delivered its decision on 24 February.

An extensive analysis of the treatment of rents in administration (and by analogy in liquidation) was undertaken and the Court of Appeal has found:

  • The result of Goldacre and Luminar has left the law in a very unsatisfactory state – in some cases a company in administration will pay more than the true value of its use of a property, and in others less
  • Although at common law and under statute rent payable is not apportionable in respect of time, this does not impact on the discretion of the Court to apply the equitable ‘salvage’, or ‘Lundy Granite’ principle’ as explained by Lord Hoffman in Re Toshoku Finance Limited [2002] UKHL 6 – namely that if a company remains in possession of a property the landlord should receive full value.
  • The High Court in Goldacre and Luminar erred in failing to apply this principle.
  • On a true interpretation of the salvage principle a company in administration (or liquidation) which is using leasehold property must
    • make payments at the rate of the rent for the duration of any period during which it remains in possession of the demised property for the benefit of the winding up or administration as the case may be.;
    • The rent will be treated as accruing from day to day;
    • Those payments are payable as expenses of the winding up or administration; and
    • The duration of the period is a question of fact and is not determined merely with reference to which rent payment days occur before, during or after that period.

The effect of this decision is that rents return to being treated as they were prior to Goldacre – effectively applying the long standing position set out in of Atlantic Computers that administrators (and liquidators) will be responsible for paying rents as an expense for the period for which a property is used.

The Court of Appeal’s decision is a statement of the correct interpretation of the law as it stands – as the Court of Appeal have held that the High Court decisions in Goldacre and Luminar were incorrect some more recent insolvencies may be revisited by those who have been adversely affected by the impact of those decisions.

It should be noted, though, that the respondents are considering an appeal to the Supreme Court – the position may not yet be settled once and for all.