< Back to E:gen - September 2014

Insolvent tenants: Administrators to “pay for what they use”

Wed 17 Sep 2014

In an important ruling for landlords and administrators alike, the Court of Appeal held in Jervis v Pillar Denton; re Game Station ([2014] EWCA Civ 180) (“Game Station”) that administrators must make payment in respect of rent for any period during which he retains possession of the demised property for the benefit of the administration and that such rent would be treated as accruing from day to day. Such rental payments would be treated as administration expenses and would therefore be payable in priority to preferential creditors, floating charge holders and the general body of unsecured creditors.

The decision represents a welcome return to the “pay for what you use” principle and strikes a fairer balance between different creditor and expense groups.

Summary

The position following the decision in Game Station can be summarised as follows:

  • Where an administrator makes use of leasehold property for the purposes of the administration, then rent is payable as an expense of the administration for the period of such use and will be treated as accruing from day to day for that purpose. 
  • Such use for the purposes of administration does not necessarily begin on the date of administration and may commence on some later date. The key concept is that of “beneficial retention” – the period during which the administrator is actually retaining the property for the benefit of the administration.
  • The principle applies regardless of whether the rent is payable in advance or arrears and the date upon which the rent becomes payable (usually the quarter days), is irrelevant.
  • For rent falling due in advance after the commencement of the administration or liquidation, a "wait and see" approach is to be used to determine what will be payable for the actual period of beneficial retention, restoring the Atlantic Computer Systems (No. 2) [1990] BCC 454 approach to measuring administration expenses.

The position prior to Game Station

Prior to the decision in Game Station, the leading cases were Goldacre (Offices) Ltd v Nortel Networks UK Ltd [2011] Ch 455 (“Goldacre”) and Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd [2013] 3 WLR 1132 (“Luminar”). The Court of Appeal in Game Station overruled both of those decisions.

In Goldacre, it had been held that if a quarter's rent is payable in advance (as is the usual case) and it fell due to be paid during a period in which administrators were retaining the property for the purposes of the administration, the whole of that quarter's rent was payable as an administration expense even in circumstances where the administrators gave up occupation during that same quarter.

In the case of Luminar, it had been held that where a quarter's rent payable in advance fell due before entry into administration that rent was simply provable as a debt in the administration even in circumstances where the administrators retained possession for the purposes of the administration.

It was felt by many that the decisions in Goldacreand Luminar were unsatisfactory and had led to a situation whereby, depending on the date the rent fell due and the date of the administration, the landlord would be entitled to more than the true benefit to the officeholder (in circumstances where the quarter day fell during the period when the administrator was using the property) or less than the true benefit (in circumstances where the relevant quarter day fell prior to the administration).

Taken to its extreme, the net effect of Goldacre and Luminarwas that (assuming that rent was payable quarterly in advance):

  • An administrator appointed the day after a quarter day could use the property until the next quarter day without incurring any rent as an administration expense; but
  • An administrator appointed the day before a quarter day and who only used the property for two days, would have to pay the entirety of that quarter’s rent as an administration expense.

The Game Station decision

It was common ground between the parties in Game Station that the court should apply the “salvage principle” to administration expenses.   The “salvage principle”[1] provides that:

"if the company for its own purposes, and with a view to the realisation of the property to better advantage, remains in possession of the estate, which the lessor is therefore not able to obtain possession of, common sense and ordinary justice require the court to see that the landlord receives the full value of the property."

The Court of Appeal in Game Station held that the “salvage principle” was one that informed the interpretation of the rules as to what could rank as an expense of an insolvency process and therefore, in order to rank as an expense a liability must fall within the rules as interpreted in light of the “salvage principle”.

The Court of Appeal concluded that the true extent of the “salvage principle” is that the administrator (or liquidator) must make payments at the full rate of the rent for the duration of any period during which he retains possession of the property for the purposes of the insolvency process; that such rent will be treated as accruing from day to day; and is payable as an administration expense. The duration of such period is a question of fact and is not determined merely by reference to which rent days occur before, during or after that period.

Practical Consequences for Administrators and Landlords

The decision in Game Station strikes a fair balance between the often competing creditor and expense groups.

For landlords it ensures that, regardless of when the administration order is made, if the administrator uses their property for the benefit of the process, they should be paid in full for that use as an expense of the administration.

For administrators, it ensures that the only rent that the administrator will be liable to pay as an administration expense relates to that period during which he has actually retained the property for the benefit of the insolvency process.

 
UPDATE : Game Station Limited applied to the Supreme Court for permission to appeal against the decision of the Court of Appeal but such permission was denied on 31 October 2014.

[1] as set out in the case of Re Lundy Grantite Co ex parte Heaven (1870 – 71) LR 6 Ch App 464

Submit your comment

To submit a comment you need to be a registered member

Register

Already a member?

Sign In