A clear judgment in favour of landlords was handed down on 24 February 2014 by the Court of Appeal in the Game group litigation. This decision changes the position on when rent is payable as an expense of the administration and means that administrators can no longer exercise the tactic of putting companies into administration, just after a rent quarter day, in order to avoid paying rent for that quarter as an expense of the administration while retaining occupation.
The law relating to the payment of rent by administrators: Historically, where a company entered insolvency after a rent payment had fallen due, a landlord had only an unsecured claim in the insolvency for their unpaid rent. However, where the property was being used for the benefit of the insolvency (e.g. so that the company could continue to trade for the benefit of the creditors), the Lundy Granite principle (See Re Lundy Granite Co, ex p Heaven (1871) LR 6 CH App 462) provided that the landlord’s claim was elevated to rank as an insolvency expense and was therefore payable ahead of any unsecured claims. Where only part of the property was used for the benefit of the insolvency, the officeholder would pay rent relating only to that part as an expense. The remainder would rank as a provable unsecured claim. Similarly, where an officeholder vacated the property part way through a quarter, he would only pay the rent and other payments relating to the time he was using the property as an expense. This position changed with the following two High Court decisions: (1) in Goldacre (Offices) Limited v Nortel Network UK Limited (2009) the Court found that if a quarter’s rent, which was payable in advance, fell due during a period in which the administrators were retaining the property for the purpose of the administration, then the entire quarter’s rent was payable as an administration expense, even if the administrators were to give up occupation before the end of that period; and (2) in Leisure (Norwich) II Limited v. Luminar Lava Ignite Limited (2012) the High Court decided that where a quarter’s rent, which was 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 whole of that quarter. In those circumstances rent was simply provable as an unsecured debt in the administration.
The consequence of these two decisions was that it became increasingly common for administrators to be appointed on the day immediately after a rent quarter date (assuming rent was payable in advance and not in arrears), thereby avoiding liability to pay rent for that quarter as an expense of the administration, even if they retained possession of the leasehold property for the whole of that period.
The Game case: In this case one of the companies in the Game group was the tenant of numerous leasehold retail properties from which the group traded. Most of the leases provided that rent would be payable quarterly in advance on the usual quarter days, as a result of which on 25 March 2012 approximately £10m in rent became due under the various leases. The Game group entered into administration on 26 March 2012 (just before the March quarter day). While some of the stores were closed immediately many remained open and continued to trade. Subsequently, the majority of the assets were transferred to a separate company called Game Retail Limited, the company who defended this appeal. An assumption behind the administration was that the rent in respect of the first three months of the administration would be payable as an unsecured claim in the administration and not as an administration expense (following the decisions in Goldacre and Luminar). Many of the commercial landlords brought a claim for the unpaid rent to be paid as an expense of the administration.
For the first instance hearing, the parties had agreed that the Judge would be bound by Goldacre and Luminar and therefore invited the Judge to make a decision in line with the existing authorities, by consent, and then to refer the question to the higher authority of the Court of Appeal (which would not be bound by Goldacre and Luminar as these were only first instance decisions). The Judge agreed, and the case was accordingly referred to the Court of Appeal.
Decision - whether part of an instalment of rent payable in advance could be treated as an expense: The key issue revolved around the question of whether part of an instalment of rent payable in advance could be treated as an expense in an insolvency situation. Previously, arguments had focused on the point that rent payable in advance is not apportionable under the Apportionment Act 1870, so pre-administration liability for rent could not be treated as an expense. However, the landlords argued that the question of apportionment was irrelevant and instead relied on what is known as the “Lundy Granite principle” or “salvage principle”. In short, this principle allows, on equitable grounds, liabilities incurred by a company in respect of property before the insolvency to be treated as an expense in the administration, if the property is retained by the administrator.
Held: The Court of Appeal (Lewison LJ giving judgment) held that the reasoning in Goldacre was wrong on the basis that just because under the Apportionment Act 1870 rent that is payable in advance cannot be apportioned does not mean that, in equity, rent cannot be treated as if it were accruing on a day to day basis for the purposes of the Lundy Granite principle. The Court of Appeal further held that Luminar was incorrectly decided and dismissed the assumption that a provable debt and an expense of the administration or liquidation were mutually exclusive.
The Court of Appeal unanimously overruled the decisions in Goldacre and Luminar, by applying the Lundy Granite principle to rent falling due before and during the period of administration or liquidation, thereby permitting parts of liabilities to be treated as expenses of administration or liquidation, so that: (1) the administrator (or other office holder) must pay rent for the period for which he retains possession of the property for the benefit of the administration (i.e. the period of “beneficial retention”); (2) payment accrues due on a daily basis; (3) payment of these sums is an expense of the administration; and (4) the duration of the period is a question of fact, and is not determined by reference to when the rent falls due.
Comment: The Court of Appeal decision has generally been welcomed by landlords and insolvency practitioners: by landlords since it prevents tactical filings immediately after the rent quarter date and by insolvency practitioners since it returns the law to what is perceived to be the “fair” outcome and has removed uncertainty that was in the market whilst the Goldacre and Luminar decisions were good law.
However, it is worth noting that it remains open to the administrators of the Game group, or Game Retail Limited, to challenge the Court of Appeal’s decision before the Supreme Court, although they will need permission from the Supreme Court to do so.