Out-Law News | 24 Feb 2014 | 4:18 pm | 3 min. read
The judgment, granted in favour of the landlords of hundreds of stores belonging to retailer Game when it fell into administration in March 2012, overturns existing case law under which landlords were ranked among other unsecured creditors of an insolvent business, even where the administrators continued to trade from the stores.
Property law expert Stuart Wortley of Pinsent Masons, the law firm behind Out-Law.com, said that although the decision was "widely expected" and would be likely to be appealed to the Supreme Court, it would have "significant implications".
"The issue at stake in the Game case is an important point which arises in almost all administrations," he said. "It has significant implications for landlords, insolvency practitioners and the purchasers of insolvent businesses. The fact that the case was brought through co-operation between some of the UK's leading landlord companies and administrator PwC, as well as the purchasers of the Game business, is an unusual but positive development."
"The payment of rent in administration will no longer be a product of luck or tactical timing – administrators are now required to pay apportioned rent for the periods that leased property is used for the purposes of administration. Administrators and landlords will be looking back at previous rent payments, and refusals to do so, to reconcile them in the light of this decision," he said.
The judgment revisits a 2009 High Court decision, in which a judge found that the full amount of rent falling due during administrators' beneficial use of an insolvent business' premises would automatically rank as an expense of the administration, even if the administrators only made partial use of the leased premises or for only part of the rent period. This appeared to be a victory for landlords, as administration expenses are typically paid in full. This became known as the 'Goldacre principle', after the company involved in the case.
While the Goldacre case appeared to be a victory for landlords, in April 2012 the court confirmed the logical flip-side to this in a case involving collapsed nightclub chain Luminar. Here, the High Court held that any rent falling due before administrators are appointed must instead be classed as an unsecured debt, which will usually go unpaid, even if the administrators subsequently use the leased premises during that rent period.
As matters stood, with commercial property rent often payable on a quarterly basis, this pair of decisions meant that administrators could legally trade the business from the rented premises for as long as three months, protected from landlord enforcement action and with landlords only able to recover payment in the same way as other unsecured creditors. When Game went into administration on 26 March 2012, one day after the company's quarterly rent payments were due, the timing meant that administrators did not have to pay that quarter's rent despite continuing to trade from the stores.
In his leading judgment, Lord Justice Lewison said that the two cases had left the law "in a very unsatisfactory state". Depending on the timing of the insolvency process, administrators would either end up paying "more than the true benefit" of their use of the property or, as in this case and the Luminar decision, less. This was because the judges in these cases had incorrectly looked at whether it was possible to apportion rent payable in advance at common law, rather than at the equitable 'salvage principle' that is used as "a gloss on the correct construction of the statutory rules of priority of debts both in liquidation and administration".
"The true extent of the principle, in my judgment, is 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)," he said. "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."
According to the Court of Appeal, approximately £3 million in unpaid rent remains outstanding from March 2012.