Appeal Court ruling on liability for rent in insolvency case
John Bradshaw recently wrote this article which appeared in the East Anglian Daily Times on 11th March 2014.
The recent decision of the Court of Appeal in Game Station * (“the Game Decision”) is a key ruling for both landlords and insolvent companies and will have an impact on the options available to tenants in financial difficulties and the advice provided by insolvency practitioners in those circumstances.
Background
Prior to the Game Decision the general approach under Goldacre** and Luminar*** was that only rent falling due for payment within the period of Administration was, in certain circumstances, payable as an expense of the Administration. This had the potential to produce an unsatisfactory result for landlords, tenants and/or the tenant’s creditors.
Taking, for example, a company which entered Administration and was the tenant under a lease pursuant to which the rent was payable quarterly in advance on a quarter day.
Under Luminar if the Administration commenced the day after the quarter day and rent was unpaid, the company would be entitled to use the premises effectively “rent free” for virtually a whole quarter. Provided that the company vacated the premises prior to the next quarter day no rent would be payable as an expense of the Administration rather it would be an unsecured claim.
Conversely, under Goldacre, if the quarter day fell within the Administration period, the entire quarter’s rent which fell due during the Administration would be payable as an expense of the Administration regardless of whether the company in Administration occupied only for a short period after the quarter day.
Unsurprisingly, if Administration was considered to be the appropriate way forward for a tenant company in financial difficulties then often to the detriment of landlord’s (given their lack of control) the timing of entry into Administration became a key factor in the decision making process.
The Game Decision and its potential impact:
The Court of Appeal has overturned the decisions in Goldacre and Luminar on the basis that they were flawed in failing to apply certain longstanding equitable principles **** to the payment of rent.
The Court of Appeal held that on a proper interpretation of those equitable principles, where a company in Administration uses leasehold property, rent will accrue due from day to day and be payable as an expense of the Administration for the duration of any period during which the property is utilised for the benefit of the Administration.
The decision ought to provide greater certainty for all parties and rebalance the emphasis away from the recent focus on the timing of Administration; may lead to swifter decisions by Administrators to vacate properties (particularly in situations where the benefit to the Administration is not significant); may well lead to close consideration of what amounts to beneficial utilisation of property; and has potentially wider implications in relation to other third party assets of insolvent companies.
It is not yet known whether an appeal to the Supreme Court will be considered.
* Pillar Denton Limited & 5 ors v Michael John Andrew Jervis (1) Stuart David Maddison (2) and Game Retail Ltd (3) [2014] EWCA Civ 180
** Goldacre (Offices) Limited v Nortel Networks UK Limited [2009] EWHC 3389 (Ch)
*** Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd [2012] EWHC 951 (Ch)
**** “The Salvage principle” deriving from the case of Re Lundy Granite Co (1870) LR 6 Ch App 462
John Bradshaw is an Insolvency & Business Recovery solicitor at Barker Gotelee, solicitors in Ipswich
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