Many landlords feel unfairly caught up in the process of company administration. Administration is used to reorganise or realise the assets of an insolvent company under the protection of a statutory moratorium which, for example, would prevent a landlord from forfeiting a lease for any arrears of rent arising before appointment of the administrator without the consent of the administrator or the court. In addition the process of administration will often involve continued use of tenanted premises in order to facilitate the sale of the business or part of it as a going concern.
As a result of recent court decisions landlords find themselves prevented from recovering rent accruing during such periods of occupation as an administration expense where administration has occurred after a rent payment date. In the case of Goldacre (Offices) v Nortel Networks UK Ltd (2009) the court held that the quarter's rent, which had accrued prior to the administration, was due in full notwithstanding that administrators may vacate the premises during that quarter. It was perhaps then not a surprise that in the case of Leisure (Norwich (II) Ltd v Luminar Lava Ignite Ltd (2012) the high court held the corollary and rent payable in advance and falling due before the commencement of the administration was not payable as an administration expense.
As a result of these decisions there was a clear window of opportunity and if the placing of a company in administration was timed appropriately, just after a rent payment day, an administrator can enjoy up to three months use of landlords' premises without paying rent. Landlords could only recover rent due for that period as a debt in the administration (with other creditors) rather than as an expense of the administration securing payment in priority to those creditors, despite the use of their premises aiding the company's recovery or sale.
Furthermore if a pre-pack sale is negotiated before the company's administration (which sales complete on or shortly after the administrator's appointment) any successor company can also enjoy occupation without having to pay rent until the next quarter day.
A group of landlords called time on this situation following the administration of the Game group of companies in 2012. One of the companies in the group was the tenant of many hundreds of leasehold retail properties selling computer games and equipment. In the main the leases of those properties required rent to be paid quarterly in advance on the usual quarter days: 25 March, 24 June, 29 September and 25 December in each year. Rent due on the 25 March 2012 of approximately £10 million under those leases was not paid and the group was placed in administration the next day. Some stores were closed down immediately but there followed a swift sale of the business including the more profitable leasehold sites and assets of the group to a new company called Game Retail Ltd, not part of the original group.
As Game group had been placed into administration on 26 March, Game Retail Ltd took the view based on the previous cases that no rent was due from it until the June quarter day. The landlords disagreed and sought to overturn the earlier decisions. The administrators were neutral on the issue and took no part in the proceedings. At first instance the high court followed those most recent decisions but last week the Court of Appeal decided that the law had taken a wrong turn and found in favour of the landlords.
Court of Appeal decision
As the Court of Appeal stated "at the heart of the appeal is the question whether part of an instalment of rent payable in advance can be treated as an expense in the context of insolvency" and thereby be an expense of the administration. Part of the difficulty for the landlords in making their case was that having missed the rent payment date when the full quarter was due to be paid, rent payable in advance is not apportionable at common law or under the Apportionment Act 1870.
Instead the landlords relied on the "salvage principle" an equitable relief which operates as a gloss on the construction of the statutory rules on the priority of debts when a company becomes insolvent. Rent payable in arrear is, of course, recompense for occupation already enjoyed. The landlords were seeking that this be extended to liabilities incurred before the administration but in respect of occupation for the benefit of the insolvent company – what Lord Justice Lewison called "the period of beneficial ownership".
The Court of Appeal decided that the Goldacre and Luminar decisions had left the law in a "very unsatisfactory state" and had not properly taken into account much earlier decisions regarding the salvage principle. Debts accruing both before and after the company being placed in administration must be paid for during any period which the administrator retains possession of the property and during this period of beneficial ownership rent should be treated as accruing from day to day.
This decision has good news for both sides – landlords will receive rent when their premises are occupied in connection with the administration but the administrators will not pay for longer than their actual occupation. Payment of rent will not longer be an accident of when the administration occurs but will be based on beneficial use of the premises.
It is possible that administrators will make decisions about closing premises more quickly as rent accrues each day and landlords will only receive rent as it falls due, but for the moment many argue that balance has been restored between the competing interests of the administration and the landlords. It is possible, however, that with over £3 million of rent at stake that this ruling will be the subject of an appeal by Game Retail Ltd.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2014. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.
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