Landlords have scored a victory in the on-going battle as to whether rent should be paid as an expense of the administration following the decision of the Court of Appeal in relation to the administration of Game.
In our previous Law-Nows (click here for link to 4 April 2012 and 19 April 2012) we reported on a decision of the Court in the case of Leisure (Norwich) II Limited -v-Luminar Lava Ignite Limited (in administration). This case followed in the footsteps of the much publicised Goldacrecase which held that if a company in administration is using leased property for the purposes of the administration on the day rent falls due, then the full rent is payable as an expense of the administration, whether or not the use continues throughout the relevant rental period. Luminar held however rent which fell due prior to the administration could not be recovered by the landlord as such an expense.
As then became common practice following these decisions, Game entered administration on 26 March 2012, one day after the March quarter rent payment day under hundreds of its leases (as in most cases rent was payable quarterly in advance on the usual quarter days), thus looking to avoid liability to pay these rents even if they retained possession of the relevant properties throughout the March quarter rental period. Game’s March quarter rents amounted to approximately £10m (net). Of the stores that continued trading, approximately £3m of the March rent remained outstanding when administrators were appointed.
The administrators, relying on the High Court's decisions inGoldacre and Luminar, refused to pay the rent as an administration expense because the rent fell due the day before their appointment. The landlords, arguing that the law was unfairly weighted in Game's favour, commenced a legal challenge to the current law seeking recovery of the £3m in unpaid rent.
At first instance the judge felt bound by the decisions inGoldacre and Luminar, which had held that since rent payable in advance could not be apportioned under the Apportionment Act 1870, the Salvage/Lundy Graniteprinciple did not apply. However the Court of Appeal allowed the appeal by the landlords to overturn theGoldacre and Luminar judgments. It unanimously held that the Salvage or Lundy Granite principle is a construct of equity and therefore applies even though rent payable in advance could not be apportioned under the Apportionment Act 1870. Whilst not holding that the full March quarter’s rents were payable, the Court of Appeal held that the administrators must make payments at the rate of the rent for the duration of any period during which they retain possession for the benefit of the administration or liquidation with rent being treated as accruing from day to day and payable as an administration or liquidation expense. The decision therefore represents a return to the 'pay as you go' model that was previously practised.
It is anticipated that Game will appeal the decision to the Supreme Court. However for the time being this decision provides certainty from the perspectives of both landlords and insolvency practitioners. Landlords will know they are owed rent for the period their property is used for the benefit of an administration or liquidation and insolvency practitioners will return to the pre-Goldacre practice of paying only for what they use when it comes to leased premises.