Prayers are answered in the Gamestation verdict, reports Richard Palmer, as the liability of administrators of insolvent companies to pay rent has been clarified.

The Court of Appeal made its long-awaited decision in the Gamestation case (Pillar Denton Ltd and others -v- Jervis and others) on 24 February 2014. It decided to overrule the High Court decisions in Goldacre (Offices) Limited -v- Nortel Networks UK Limited (in Administration) and Leisure (Norwich) II Limited -v- Luminar Lava Ignite Limited (in Administration). Insolvency practitioners occupying property for the purposes of the administration must pay rent apportioned for the period of occupation, regardless of when the rent falls due for payment under the lease.

There is one note of caution, however: the decision is being appealed to the Supreme Court. Whilst confirmation from the highest court in the land would be welcome, the appeal creates unwelcome uncertainty until the outcome is known.

Unpopular decisions

The effect of the Goldacre decision was to make administrators liable to make full payment of any sums due under a lease as they fell due, regardless of how long the company in administration was occupying the premises. On the face of it, this appeared to be a victory for landlords, as they were entitled to full payment of rent due under leases.

Ultimately, the victory was pyrrhic and the timing of the appointment of administrators became fundamental. Administrators would often be appointed shortly after rent fell due. For example, the administrators of the Game group were appointed on 26 March 2012, the day after the March quarter rent fell due. Game’s quarterly rent liability was approximately£12 million at that time.

This prejudice on landlords led to a challenge to the Goldacre decision in the Luminar case.

Luminar decided that administrators were not liable to make any contribution towards sums of rent falling due before their appointment, even if the company entered administration during that rent period and occupied the premises. The landlord could merely prove in the administration for repayment of that debt as an unsecured creditor.

The rationale for these decisions was that the Apportionment Act 1870 did not allow for sums of rent payable in advance to be apportioned. As a consequence, a landlord seeking to claim rent that fell due before the tenant entered administration could only claim in the administration as an unsecured creditor for that rent.

Likewise, administrators had to pay the full amount of rent due if they were occupying property for the purposes of the administration on the rent day, even if they were not intending to use the property for the entire period that they were paying rent for. Luminar held that rent payable in advance and accruing before the administration could not be recoverable as an expense of the administration.

This was unpopular with both insolvency practitioners and landlords. Insolvency practitioners were effectively forced to choose between the interests of landlords and creditors generally. Because of this, landlords did not always obtain full value for the use of their property.

Example

T Ltd occupies premises under a lease from L Ltd, with the annual rent payable in advance on the usual quarter days - 25 March, 24 June, 29 September and 25 December.

Before the Gamestation decision, if T Ltd entered administration on 26 March (the day after the March quarter day), the administrators would not have had to pay any part of the March quarter’s rent as an expense of the administration.

The full March quarter’s rent would have remained a debt due to L Ltd from T Ltd, but the landlord’s chances of recovering that rent from the insolvent tenant would inevitably be low. The administrators could have used the premises for nearly three months without having to pay any rent to L Ltd.

But, if the administrators were still using the premises on 24 June, they would have had to pay the full June quarter’s rent as an expense of the administration, even if they only intended to continue using the premises for a short period after 24 June.

Gamestation

In Gamestation, Lord Justice Lewison stated that the Goldacre and Luminar decisions left the law in a very unsatisfactory state.

The Court of Appeal decided that these previous cases were incorrect and that the ‘salvage principle’ applied: this means that the landlord is entitled to receive the full value of the property for the period that the administrators occupy the property for the benefit of the administration. This is in spite of the fact that the lease was entered into, and the rental liability arose, before the company entered administration.

The Court of Appeal therefore ruled that administrators must make payments for the duration of any period during which they retain possession of the property for the benefit of the administration and that this will accrue from day to day.

Lord Justice Lewison held that the application of the salvage principle does not create or transfer any liability: it simply treats part of a single rental liability as an insolvency expense. The landlord has to claim for any other outstanding sums in the normal way. Lord Justice Lewison summed it up rather colloquially, however: ‘you can’t have the penny and the bun.’

Relevance

Landlords suffer further, non-financial, prejudice because they cannot rely upon self-help remedies usually available to them against companies in administration. Self-help remedies such as Commercial Rent Arrears Recovery (formerly distress) or forfeiture of the lease are not available, because companies in administration benefit from a moratorium preventing these steps from being taken.

So, the landlord has to wait for the company in administration to vacate or (seek to) assign its interest in the property. Without the Gamestation rule, this would cause unfair prejudice to landlords.

In 2013, 2365 companies entered administration - many of these will have been tenants of properties and until Gamestationtheir landlords would not have been able to force those companies or their administrators to pay rent.

Going forward, administrators and landlords will agree that a daily rate of rent be paid for the duration of the administrators’ occupation of premises for the benefit of the administration. The Court of Appeal has sensibly restored this position for everybody’s benefit: administrators can simply perform their functions without needing to weigh up the rights of landlords as against creditors generally, and landlords know that they will always receive at least some rent from tenants in administration who continue to occupy the premises.

Example

Since Gamestation, the timing of the rent payment dates and the administration becomes less important.

If a tenant enters administration on 1 May and the administrators continue to occupy the premises for the purposes of the administration, the administrators must now pay rent on a daily basis from 1 May. The landlord may still struggle to recover rent for the period from 25 March until 1 May, but the landlord will now receive some rent for the March quarter. The administrators no longer enjoy a rent free period until the June quarter day.

As the June quarter day approaches, the administrators will no longer have to choose between either vacating the premises or paying the June quarter’s rent in full. If they require use of the premises for a shorter period beyond 24 June, they will only have to pay for the period they actually use the premises.