Rent as an Expense in Administration

The Court of Appeal handed down its judgement in February 2014 in the case of Pillar Denton Limited & Ors -v- Jervis & Ors [EWCA] Civ. 180, known as ‘the Game case’.

The Background
Pillar Denton was one of several landlords to the Game group of companies.  On the usual quarter day of 25th March 2012, rent fell due to Pillar Denton and the other landlords, and on 26th March 2012 the Game group of companies entered into administration.  Some of the stores were immediately closed and some were kept open to allow the administrators to trade from them.

The Question
Approximately £3 million of the March quarter’s rent remained outstanding to the landlords, and they therefore brought a claim against the administrators, arguing that they had unfairly missed out on the March quarter’s rental payments.

The two leading decisions on rent in administration were Goldacre (Offices) Limited -v- Nortel Networks UK Limited [2009] EWCH 3389 (Ch) and Leisure (Norwich) II Limited -v- Luminar Lava Ignite Limited [2012] EWCH 951 (Ch).

The decision in Goldacre was that if a quarter’s rent (payable in advance) fell due during a period in which administrators occupied a property for the purposes of the administration, all of that quarter’s rent fell due as an expense of the administration, notwithstanding that the administrators intended or did later give up occupation in that same quarter.

In contrast, the decision in Luminar was that if a quarter’s rent was payable in advance and fell due before the administration, it was held not to be an expense of the administration, even if the administrators retained possession after the administration, and was payable as an unsecured debt in the administration.

The Game Arguments
The landlords in the Game case argued that the principles in Goldacre and Luminar were not applicable, and they sought to rely on a principle in equity (the Salvage Principle) to allow recovery of rent for the period when the administrator occupies the property.

LJ Lewison handed down the decision in the Court of Appeal and held that, as rent was not apportionable under the Apportionment Act 1870, it did not automatically follow that the equitable salvage principle was not applicable.

The Salvage Principle is a principle of equity which deems that such part of rent payable under a lease that relates to the period of use for the purposes of an administration be treated as if it were a debt incurred by the administrators and therefore an expense.

The Court of Appeal therefore decided that, in these cases, the rent should be treated as accruing from day to day, with the duration of the period of occupation being determined as a “matter of fact”.

Comment
The decision has come as good news to commercial landlords, as they will now stand on equal ground with other suppliers used by a company in administration who are able to treat their debts as an expense of administration, rather than a debt provable in the administration.

Commercial landlords should bear in mind, however, that the sums at stake are not insubstantial and will certainly justify a further appeal.  No doubt this decision will be considered again in further detail and, as soon as we hear of an appeal, or when that decision comes out, we will let you know.