The Court of Appeal has changed the law relating to the liability of administrators and liquidators to pay rent as an expense of the administration or liquidation.
In Pillar Denton & Others v. Jervis & Others [2014] EWCA Civ 180, it was decided that office holders must pay rent as an expense of the administration for the period during which a property is retained for the benefit of the administration or liquidation and that the rent would be treated as accruing from day to day. In reaching that conclusion, the Court of Appeal overruled Goldacre (Offices) v. Nortel Networks UK and Leisure (Norwich) II v. Luminar Lava Ignite.
The effect of the previous state of the law was to create a ‘sudden death’ situation as to the payment of rent. Under the majority of commercial leases, rent falls due quarterly.
Landlords would frequently find that the rent would fall due on one of the quarter days and the tenant would enter insolvency on the following day. The office holder would retain the property for the benefit of the insolvency process but the landlord would be prevented from forfeiting the lease and could only prove for the debt in the insolvency. In the case of a pre-pack sale of the business, the newco would have a three-month rent-free period.
From the office holders’ point of view, the whole of a quarter’s rent might fall due only a short time before the property was no longer required for the purposes of the insolvency process. In Luminar Lava Ignite, the March rent fell due only a few days before the administrator gave permission to forfeit. It was accepted that the whole quarter’s rent was payable as an expense of the administration.
The Court of Appeal decided that those circumstances did not reflect the true state of the law. The correct approach was to calculate the “period of beneficial retention”, which is the period for which the property is retained for the benefit of the insolvency process. The rent would be treated as falling due on a daily basis, thus ignoring the date on which rent fell due under the lease. Rent treated as falling due within the period of beneficial retention would be paid as an expense of the insolvency process. Rent treated as falling due outside that period would be provable as any other debt.
The decision achieves a fairer result for landlords in particular and for office holders to a lesser extent. However, there is a hint in the judgment that there may be a further appeal to the Supreme Court, so that we may not have heard the last of it.
