Landlords can rejoice following the Game administration decision

When will unpaid rent accrued during the administration period have to be paid? Joe Bannister, restructuring partner, and Mathew Ditchburn, real estate disputes partner with Hogan Lovells comment on the ruling in Pillar Denton v Jervis and say it’s a good decision for landlords.

Original news

Pillar Denton Ltd and others v Jervis and others [2014] EWCA Civ 180, [2014] All ER (D) 212 (Feb)

The Court of Appeal has returned to the ‘pay for what you use’ principle in its decision in the Game appeal handed down on 24 February 2014. In a leading judgment by Lord Justice Lewison, the Court of Appeal decided that an office holder (be it an administrator or liquidator) must make payments at the rate of the rent for the duration of any period during which he retains possession of the property for the benefit of the administration or liquidation (as the case may be). The rent is to be treated as accruing from day to day and is payable as an expense of the administration or liquidation.

The decision, which overruled both Goldacre (Offices) Ltd v Nortel Networks UK Ltd (in administration) [2009] EWHC 3389, [2010] All ER (D) 54 (Jan) and Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd (in admin) [2012] EWHC 951 (Ch), [2012] 4 All ER 894, applied the salvage principle (an equitable principle) which deems that a liability incurred before liquidation or administration to pay rent under a lease relates to the period of use for the purposes of administration as if it were a debt incurred by the administrators or liquidators, and thus is payable as an expense. The inability at common law to apportion rent that is payable in advance accordingly does not apply.

What happened in the case?

The Game group was yet another retailer making an attempt to negotiate a rescue which didn’t work out and on the rent quarter day (25 March 2012) £10m was due under its various leases which the company was unable to pay. The following day the company was placed into administration having failed to make the rent payments. An assumption behind the administration was that no rent would fall due during the three months following the start of the administration because rent only fell due on the quarter day (following the decisions in Goldacre and Luminar). There was about £3m of unpaid March rent remaining at the end of the administration.

What does the decision in the Game appeal mean for administrators appointed to a company with leasehold premises?

Administrators will need to decide on which premises they require, and which they don’t. If they require particular premises they are going to need to be prepared to pay, as an expense of the administration, rent for the period of their occupation. The administration moratorium might allow an administrator to say: ‘you are not allowed to repossess without permission of the court’, but if an administrator is refusing to pay rent the court is not going to look terribly sympathetically on him. In effect, an administrator needs to be prepared to ‘pay for what he uses’.

What does this mean for administrators who, following appointment, are looking to sell a leasehold property as part of the assets of the company?

An administrator selling a property will have been paying rent up to the date on which he is planning to let his buyer in. Normal practice is that the administrator transfers leasehold property to a buyer on an ‘as is, where is’ basis. The sale contract will give no assurances at all either as to the company’s right to occupy the property or as to the willingness or otherwise of the landlord to permit the buyer to take an assignment of the lease. The sale contract will also contain a provision in which the buyer is asked to provide an indemnity to the company in administration and the administrator from any claims the landlord might make against the company and the administrator for allowing the buyer into the property. To that extent it will not change the practice of a sale at all.

Game could conceivably make a difference to administrators deciding which sites to trade from and which sites should be vacated. Where sites are marginal, an administrator might in the past have thought ‘this is marginal, but I could trade from it for a quarter and it won’t cost me anything’. This probably won’t happen now—because the rent will be payable on an apportioned basis.

On a positive note, there might be situations where an administrator appointed just before a quarter day now thinks there is scope for trading a business because their only risk is a daily rate of rent. Before, they may not have assumed the risk of quarterly rents under Goldacre and would have pre-packed if they had a buyer or shut down the business if not. On the other hand, where in the past administrators have only traded because they had the benefit of a rent free period under Luminar, that is no longer going to be an option unless they can get the landlords’ agreement.

What does this mean for administrators who are trading a business from just part of a property?

An administrator should now have a better case for arguing that he or she should pay rent pro tem for the part of the property he or she is occupying. However, if the lease is of the whole property, and the effect of the partial occupation is that the landlord is being denied the ability to exploit the rest of the property unit, there must be a risk of the landlord saying to the administrator ‘I need all the rent please’.

The judgment does say that the way that equity works is that if an administrator is using the property, then he must pay the rent which the lease stipulates should be paid.

Did the judgment deal with other property related costs such as insurance, service charge, dilapidations, and so on?

No, but they are all likely to go the same way. Insurance and service charges are likely to be grouped with rent. As regards dilapidations, the same way that the Court of Appeal applied equitable principles to the contractual obligation to pay rent should lead to administrators’ dilapidation’s liability being apportioned only to those accruing while they used the premises.

Are there any steps an administrator can take on day one to avoid becoming liable for rent of a property as an expense of the administration?

An administrator either needs to start work with a clear idea as to those properties that he does not require, or to form that idea within the first day or so of his appointment. He should then contact the relevant landlords, and hand back the keys for those properties that he does not require, offering to surrender the lease. This will make it clear that they are not intending to use the property. If the administrator is willing to try to find a buyer for the property but only if the landlord agrees not to claim rent for any period while they are doing that, an express agreement will need to be entered into.

What is the result for landlords if a tenant enters administration?

Overall, this is a good decision for landlords because the ‘quarterly rent holiday’ which has arisen from Goldacre and Luminar had become industry norm, and a real problem for landlords. The fact that it has now gone will be a source of considerable relief to landlords. Institutions could probably measure the amount lost in ‘Luminar rent’, in millions and millions of pounds. They will now need to speak to administrators and work out how they are going to manage rent payments, because Goldacre might have been problematic but at least it was clear that rent was to be paid on the quarter day in advance. Both sides will need instead to debate and reach a mutually acceptable approach.

What does this mean for landlords with tenants already in administration where rent was not previously paid as an expense under the Goldacre/Luminar principle?

The ruling in Goldacre has been a source of enormous frustration, opportunity and uncertainty within the restructuring profession. The Game administrators decided to take this test case on the basis that the buyer of the game business would provide an indemnity for any rent falling due in the event the landlords’ appeal succeeded. The judge at first instance said he was bound by the ruling in Goldacre, leading in turn to the appeal that has just taken place.

We have now moved back to the much more sensible regime we had before 2009, so there should be fewer disputes between landlords and insolvency practitioners about paying the rent. We may see landlords coming back for the rent they should have been paid recently. Many administrations were, for obvious reasons, timed to start immediately after rent fell due for payment and many landlords may now be thinking they should return to administrators to demand the payment of such rent.

What should lawyers who are advising administrators or landlords be advising now by way of best practice following the appointment of an administrator to a tenant?

If we were advising the landlord we would say: get in contact with your administrator and find out what’s on offer, reserving your right to assess any such offer on its merits. Don’t take any hasty action but listen to what’s being offered, because it may or may not be to your advantage.

Is an appeal to the Supreme Court is likely?

There’s always that possibility but we do not know what appetite the parties would have to pursue an appeal.

*Update by LexisNexis Randi blog on 31 October 2014 - Supreme Court have refused Game's application to appeal the Court of Appeal decision. See here*

Interviewed by Nicola Laver.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

For more information on rent and administration expense generally see our Lexis R&I PSL notes: Administration expenses: current issues; Rent as an expense of administration

 

 

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