The recent Court of Appeal decision in the Game Station case has established that administrators should pay rent on a daily basis while they are using the property. This overturns the earlier High Court decisions in the Luminar and Goldacre cases and is in keeping with the recent trend of flexibility and fairness in insolvency situations.
Leasehold property in an administration
An administrator’s role is to try and either rescue a company or to maximise the amount of money that the creditors of the company receive when it is wound-up. The administrator is under a duty to act in the interests of the creditors as a whole but these interests will inevitably conflict: the more that’s paid out to one creditor, the less that’s available to another. Where the company in administration has a lease, the landlord will be a creditor and the amount that he receives will depend on whether or not the administrators want to trade from, or otherwise make use of, the leasehold property.
Sometimes an administrator will decide that he has no need for a particular property and will not use it. In this situation the rent continues to be due under the terms of the lease, but only as an unsecured debt. This means that that landlord is likely to receive only a proportion of the total rent due: he will have a share of the same pot as all the other unsecured creditors.
However, an administrator will often need to occupy and use a leased property for the purposes of the administration, at least for a short time while he arranges for the sale of the business and its assets. In this situation the rent due will almost always be treated as an expense of the administration. This means that it is paid out in priority to all other sums, so the landlord is likely to receive the full amount of rent due for the period the property is used for the benefit of the administration.
Administrator’s liability for rent before the Game Station case
The rules that were applied in Luminar and Goldacre resulted in an outcome that was almost always unfair to either the landlord or the other creditors. In most commercial leases rent is usually payable quarterly in advance on a specified due date. Prior to the Game Station decision, the position was that the administrator was only liable to pay rent as an expense if he was using the property on the date the lease specified the rent fell due to be paid. This was almost always unfair in some way:
- The administration could be carefully timed to begin on the day after the rent fell due. Where rent was payable quarterly this effectively gave the administrator three months’ use of the property without the rent becoming an expense of the administration. This is unfair to a landlord.
- If the property was used for the purposes of the administration on a rent payment date and for just a day or two after that, the full quarter’s rent would nonetheless be payable as an expense of the administration. This is unfair to the other creditors as the total assets of the company are reduced by the amount paid out to the landlord.
The decision in the Game Station case
The Court of Appeal decision in the Game Station case (Pillar Denton Ltd and others v Jervis and others) has dealt with both of these issues by determining that the rent is payable as an expense only for any period of actual beneficial possession by the administrator. The rent will accrue daily, so if the property is used by the administrator for eg 43 days then 43/365 of the annual rent will be due as an expense of the administration. Any rent relating to days outside of this period of occupation will be payable only as an unsecured debt. The contractual rent date is disregarded for the purpose of calculating the rent payable as an expense.
The Game Station decision:
- Clarifies the position on when rent is payable as an expense of the administration and makes it fairer for all concerned.
- Means that there will no longer be any advantage in timing administrations to coincide with the day after a rent payment date – this will prevent both rushed and delayed administrations, which can have an overall detrimental effect on the creditors.
- Is likely to result in more focus on whether or not the administrator is in fact retaining possession of the property for the benefit of the administration, as this is what will determine whether rent is payable as an expense.
- Means that administrators currently using property for the purpose of the administration, particularly where occupation was taken immediately after a rent payment date, will need to revise the amount that they are expecting to pay out as an expense of the administration (though there is no requirement as to when this sum must be paid to the landlord).
- Means that landlords of tenants who are currently in administration and have already submitted their claim in the administration may wish to revisit this, as they may be able to recover some amounts as an expense that were previously included as an unsecured debt.
- Applies to liquidators as well as administrators: though it is more unusual for the property to be used in a liquidation, when this happens the rent will be due as an expense in the same way.