Case from the Court of Appeal for England and Wales considering the treatment of rent payable during an administration and whether part of a payment of rent payable in advance could be treated as an expense of administration (and thus paid in priority to unsecured debts).
One of the companies in the Game group of companies was the tenant of many hundreds of properties from which the group traded. The rent in respect of most of those properties was payable quarterly in advance on the usual English quarter days (which include 25 March). On 25 March 2012 approximately £10m in rent became due under the leases and on the following day the Game Group went into administration. Trading continued from some stores which were included in a sale of the business and assets of the group to Game Retail Limited which was outwith the group. Approximately £3m in rent was said to be outstanding in respect of those stores.
The cases of Goldacre (Offices) Limited v Nortel Network UK Limited[1] and Leisure (Norwich) II Limited v Luminar Lava Ignite Limited[2] had decided that part of an instalment of rent cannot be treated as an expense in the context of insolvency. In Goldacre it was found that, where 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. In Luminar it was 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.
As a result of Goldacre and Luminar it has become increasingly common for companies to enter administration on the day immediately following a quarter day, thus avoiding liability to pay the rent in full even if they retain possession of their leased property. A quick sale of the business to a new company can also mean that the new company can, in effect, trade for the first three months rent free.
The High Court in this case followed Goldacre and Luminar. However, the Court of Appeal applied the “salvage principle” under which liability for rent incurred before the winding up may be treated as if it were an expense of the winding up (on equitable grounds) where a liquidator or other office holder retains the property for the benefit of the winding up or administration. Consequently, the court allowed the Landlords’ appeal and over-ruled Goldacre and Luminar finding that an application of the salvage principle means that:
“the office holder must make payments at the rate of the rent for the duration of any period during which he retains possession of the demised property for the benefit of the winding up or administration (as the case may be). The rent will be treated as accruing from day to day. Those payments are payable as expenses of the winding up or administration. The duration of the period is a question of fact and is not determined merely by reference to which rent days occur before, during or after that period.”
The full judgement is available from BAILII here.
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