- The Court of Appeal has overturned the existing understanding of the law in relation to the liability of a tenant company's administrators to pay rent on leasehold premises.
- The law is now that administrators are liable for the rent as an expense of the administration, calculated on a daily basis, for the period during which they use the premises for the benefit of the company. This liability is regardless of the rent due date set by the lease and of the date of the administration.
- Landlords may want to re-visit their files where they did not claim rent from administrators who were appointed immediately after a quarter day but vacated the premises before the next quarter day.
On 24 February 2014, the Court of Appeal issued its judgment in the "Game" case: Jervis & Anr v Pillar Denton Limited & Ors. The court overturned the law relating to an administrator's liability to pay rent on leasehold premises, as set out in the 2009 case of Goldacre (Offices) Ltd v Nortel Networks UK Ltd and the 2012 case of Leisure Norwich (II) Ltd and others v Luminar Lava Ignite Ltd (in administration) and others.
The Game case was brought by a consortium of landlords against the administrators of the Game companies, and also against the successor company, Game Retail Limited which had indemnified the administrators against these claims.
The administrators were appointed the day after the March quarter day in 2012, and claims brought by the landlords for unpaid rent (said, in submissions, to be around £3 million) were treated by the administrators as "normal" debts in the administration. This meant that the landlords were unlikely to be paid in any substantial amount.
The administrators' stance was based on the understanding of the law as set out in the Goldacre andLuminar cases. In both of those, albeit under different circumstances, the court at first instance had ruled that:
- Where rent was payable in advance, this was due in full on the date stated, usually the quarter day. It was not capable of being apportioned.
- Therefore, if the administrator was not in place and using the premises on the rent payment date, rent (if payable in advance) was not payable as an expense of the administration.
- This would be the case even if the premises were, in fact, used from the date after the rent payment date, right down until the day before the next payment date.
- However, if the administrators were appointed immediately before a quarter day, then they would be liable to pay, as an expense of the administration, the full amount of rent.
- And this would be the case, even if the premises were disposed of, or at least vacated, shortly after the rent payment date.
The Game administration was a classic case of the administrators using these common law rules to avoid liability: they were appointed the day after the quarter day, and they sold the business on (to a new entity, Game Retail Limited) before the next. Therefore, neither they nor Game Retail Limited were apparently liable for the rent and other sums due under the several hundred leases, even though they used the premises throughout the relevant quarter for the benefit of the business.
In the Game case, the parties agreed the existing principles at first instance and asked for a simple ruling from the High Court on, effectively, a non-contested basis. This allowed the case to proceed to the Court of Appeal.
The Court of Appeal's judgment
In a lengthy and detailed exposition of the law, Lord Justice Lewison (with whom the other members of the court unanimously agreed) set out his reasons for overturning the Goldacre and Luminar decisions.
The common law position was largely undisputed by the parties and was accepted by the Court of Appeal: as set out in those two previous cases, any rent payable in advance fell due in full on the contractual rent payment date, and was not capable of apportionment.
Where the Court of Appeal differed from the previous decisions was in relation to the application of an overriding equitable principle known as the "salvage principle", also known as the Lundy Granite principle.
This derives from a string of 19th century cases and was described by Lord Hoffman in the 2002 case of Re Toshoku Finance Limited as a principle which permits, "on equitable grounds, the concept of a liability incurred as an expense of a liquidation to be expanded to include liabilities incurred before the liquidation in respect of property after it was obtained by the liquidator for the benefit of the insolvent estate".
Quoting Lord Hoffman, Lewison L.J. described the salvage principle as an equitable principle to treat the rent liability "as if" it were an expense of the winding up. To make use of it, the landlord would need to show why he should be preferred above other creditors in this way. For example, he could demonstrate that the tenant company was obtaining a benefit from the use of the property when the landlord was obtaining no consequent benefit for itself.
Subject to that, said Lewison L.J., the error made by the courts in the Goldacre and Luminar decisions was to fail to recognise that this was an equitable principle which therefore overrides the common law rule on the question of apportionment.
Accordingly, the correct understanding following the Game decision is that, in an administration, liability for the rent is apportioned on a daily basis according to whether the premises are being used or retained for the benefit of the company. It no longer matters which side of the quarter day that period of occupation starts or finishes.
The decision also removes the distinction between rent payable in advance, as is usually the case, and rent payable in arrears. Apportionments were always made in the case of money due in arrears, whereas it is only now that administrators will pay an apportioned amount of sums due in advance.
Permission to appeal further was refused, but it is anticipated that leave will be sought direct from the Supreme Court.
Points to consider
The decision brings certainty to both landlords and administrators, insofar as both will now know the rental liability that will arise in an administration. We are essentially back to where the law stood before Goldacrewas decided.
No doubt, this decision will give a new lease of life to cases on what constitutes the administrators "using or retaining premises for the benefit of the company". There will, in any event, be a drop in the number of tactically-timed insolvencies.
However, as with the Goldacre decision, there could be other, more unexpected consequences. For example, will administrators - who now have judicial confirmation that "[t]he rent will be treated as accruing from day to day" - stop paying the whole quarter's rent in advance, safe in the knowledge that the statutory moratorium which kicked in on the tenant's insolvency, prevents the landlord from taking any further action? Only time will tell.