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Battle GAME: Court of Appeal makes a big decision of when administrators must pay rent

A decision has been handed down from the Court of Appeal in the case of Game Station (Jervis v Pillar Denton). The decision granted landlords Land Securities, British Land, Hammerson and Intu the right to recover rent from administrators that operated a retail business as a going concern whilst a buyer was sought despite the rental payment date falling before the date of the administration.

Context

These Landlords left out of pocket in the Game administration were granted leave to appeal to the Court of Appeal to challenge whether rents accruing just prior to the appointment of the administrators should to be treated as an expense of the administration (and therefore paid in priority to other creditors) The appeal was sought to overturn the position established in the Goldacre and Luminar decisions.

The consequence of this decision was that companies were strategically entering into administration on the day immediately following a quarter date, therefore avoiding rental liabilities in full even if they continued to retain possession of the leased property for the whole of the quarter.

Game appointed administrators shortly after the quarter day and it is reported that they avoided paying several millions of pounds in rent before selling the business to a new owner.

Previous Case Law

Jervis v Pillar Denton Limited (Game Station) & Ors ([2013] EWHC 2171 (Ch)) (1 July 2013)

The High Court considered the application and held that it was appropriate to follow the principles already established in the leading cases on this issue, namely:
Goldacre (Offices) Ltd v Nortel Networks UK Ltd:-

(1) where rent is payable in advance and falls due for payment before the administration starts, it is provable but not payable as an administration expense even though the administrator retains the property for the purposes of the administration for the whole or part of the period for which the payment in advance was payable;

(2) where rent payable in advance becomes due during a period when the administrator is retaining the property for the purposes of the administration, the whole sum is payable as an administration expense even though the administrator gives permission to forfeit or vacates before expiry of the period for which the payment in advance is due.
Leisure Norwich (II) Ltd and others v Luminar Lava Ignite Ltd (in administration) and others.

Court upheld the decision made in Goldacre. The court confirmed that advance quarterly rent falling due prior to the appointment of administrators is not payable as an expense, even if the company continues to trade from the property during the remainder of the quarter.

Case Law preceding Goldacre and Luminar

Re Atlantic Computers
Parties previously relied upon a pro rata “pay as you go”, daily rate for their actual usage.  When a company in administration was in occupation of a leasehold property for the purposes of administration, the administrators would agree to pay the rent from the date of the administrators’ appointment to the date that the Property was vacated. Any arrears which were outstanding when the administrators were appointed were an unsecured debt.

Lundy Granite Principle and Re Toshoku Finance UK Plc
The decision in these cases provided the proposed grounds that would result in just and equitable treatment of the rent relating to the period when the property is being used beneficially for the purposes of the Administration as ranking as an expense of the Administration.

Potential impact of the decision

The decision sees a return to the principles established by applying the “salvage principle” in Lundy Granite. The case provided that a landlord should receive the full value of the property where the company that is in administration uses it for their own purposes.

The decision will find favour with landlords as the timing of administration, as was the case here, will put an end to administrators being legally entitled to continue to use rented premises for up to three months. Landlords previously had to seek rental liabilities as an unsecured creditor now such liabilities return to be viewed as an expense of the administration and will be treated as accruing from day to day.

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Luke Patel

Partner and Head of Dispute Resolution
Commercial Dispute Resolution
LPatel@LawBlacks.com
0113 227 9316
@LukeLawBlacks
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Luke Patel Blacks Solicitors LLP