The Court of Appeal delivered judgment on Monday morning in the much anticipated appeal in Jervis & Others v Pillar Denton & Others on the treatment of rent payable under a lease held by a corporate tenant that enters administration. The case involved the Game Administration.
The primary question at the core of the appeal concerned when does rent rank as an expense of the Administration? The appeal judges commented that the previous decisions of Goldacre and Luminar had "left the law in a very unsatisfactory state". Consequently, they overturned both Goldacre and Luminar and allowed the appeal. The direct consequence of the decision is that Game Station (the assignee) will now have to pay circa £3 million in unpaid rent. However, the real ramifications of the decision will likely be the significant financial impact that the decision will now have on tenants, insolvency practitioners and secured creditors alike and particularly in retail sector insolvencies. In summary, the decision provides welcome clarity on this hotly contested issue. At the very least, Administrators will now know what payments under a lease will rank as Administration expenses.
In our view, the decision is consistent with common sense, in that it strikes a fair balance between landlords and insolvency practitioners.
The DecisionIn a nutshell, Lord Justice Lewison held that, in this case, rent fell within the principle known variously as the "salvage principle" or the "Lundy Granite principle". He set down the position as follows: an Administrator must make payments at the rate of the rent for the duration of any period during which he retains possession of the leased premises for the benefit of the Administration. That is, the rent will be treated as accruing from day to day and such payments will be treated as an expense of the Administration.
The duration of the period is a question of fact and is not determined by reference to which rent days occur before, during or after that period.
CommentThe decision of the Court of Appeal changes the current law regarding the treatment of rent as an administration expense. It means that rent will be payable as an expense on a pay-as-you-go basis and dependent on the circumstances of the Administration. The question of whether or not the Administrator is appointed before or after the quarter day is now of much less importance.
The property profession is likely to welcome Monday's decision as it brings much needed clarity on the issue. The decision will likely lead to the end of the practice of strategically timing Administrations until after the quarter day in order to avail of a rent-free period of occupation. On the flip side, it will, however, allow Administrators to benefit from increased flexibility as there will no longer be a drive to exit premises before the next quarter day for fear of having to pay rent for that incoming quarter irrespective of future occupation.
In our view, the decision is fair and equitable and does strike an appropriate balance between Administrators and Landlords.
In summary, Monday's decision has seen common-sense prevail and is the fairest outcome for all concerned. Whether Game Station considers a further appeal to the Supreme Court remains to be seen.