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First appeared in Informer: Real Estate Newsletter - Spring/Summer 2014
24 February 2014 saw a significant change in how commercial tenants in administration must pay their rent as an administration expense.
Lord Justice Lewison handed down the leading judgment of the Court of Appeal in the widely anticipated Pillar Denton Limited & Ors -v- Jervis & Ors – widely known as the Game litigation. The Court of Appeal has now stated unequivocally that where administrators are using the leasehold property of an insolvent tenant for the benefit of the administration, rent (payable as an administration expense – i.e. in preference to unsecured debts) will be apportioned on a pro-rated basis to reflect the period of use. In simple terms this means that administrators will pay rent at a daily rate based on their actual use of the property and makes the timing of quarters days (in this context) irrelevant. Consequently, the scope for tactics and strategy has been eliminated.
Since 2009, this area of law has been in some turmoil. Two first instance decisions were at its source. In Goldacre (Offices) Limited v Nortel Network UK Limited, Judge Perle QC held that if a quarter’s rent payable in advance fell due during a period in which the administrators were retaining the property for the purpose of the administration, then the whole of the quarter’s rent was payable as an administration expense, even if the administrators were to give up occupation later in the same quarter. Landlords initially hailed that decision as a victory.
However, in 2012, the corollary of that position was considered. In Leisure (Norwich) II Limited v Luminar Lava Ignite Limited the High Court decided that where a quarter’s rent payable in advance fell due before entry into administration, none of it was payable as an administration expense, even if the administrators retained possession for the purposes of the administration for the remainder of that quarter.
This meant that tenants and their administrators adopted the practice of placing a tenant company into administration immediately after a quarter day, leaving that quarter's rent in arrears. That meant the unpaid rent for that quarter ranked as an unsecured debt in the administration, and the administrators could benefit from what was effectively a quarter's rent free occupation. More often than not, the administrators ensured that they vacated the property prior to the next quarter day, ensuring that the next quarter's rent would not rank as an administration expense. Landlords were suddenly much less enthusiastic about the position.
Lewison LJ was emphatic and clear in his leading judgment. In overturning Goldacre and Luminar, He applied the well-known 'salvage principle', stating that the right of a creditor to prove for a debt in the administration, and the application of the salvage principle were not mutually exclusive. The salvage principle operated in equity, and therefore administrators were obliged to account, as an administration expense, for the rent as it accrued from day to day whilst they used premises for the furtherance of the administration.
At the time of writing an application for permission to appeal the decision in the Supreme Court has been made but not yet decided.
Tom Morton, Associate, Property Litigation Group