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Experts call for return of more flexible approach to treatment of rent on administration ahead of Court of Appeal hearing

Out-Law News | 10 Feb 2014 | 9:40 am | 4 min. read

Court of Appeal judges will consider whether the administrators of an insolvent retailer should be held liable for rent on stores that they continue to trade from when hearings begin in the Game case this week.

Four landlords who between them are claiming millions of pounds in rent that went unpaid after the retailer went into administration in March 2012 successfully had the case 'fast-tracked' to the Court of Appeal last year. They successfully argued that the High Court would have been bound by existing case law that states that administrators are not liable for rent that becomes due before administration, even if they continue to trade from the stores.

Restructuring expert Alastair Lomax of Pinsent Masons, the law firm behind Out-Law.com, said that there was a "growing expectation" that the Court of Appeal would find in favour of the landlords. He said that the principal reason for this was the Supreme Court's overturning, in July 2013, of an earlier House of Lords decision on which the judge in the previous rent on administration case had relied. The Supreme Court's decision concerned whether the Pensions Regulator should be given first claim over an insolvent company's assets ahead of other creditors and the administrators' fees.

"Very broadly, the Supreme Court held that whether or not something qualifies as an administration expense depends on whether or not it arises out of 'something done' in the administration, normally by the administrator or on the administrator's behalf," Lomax said. "This sits badly with an approach that hinges more on an accident – some would say design – of timing."

"It is argued by many that the current approach needlessly promotes a game of brinksmanship between landlord and tenant in which the winner takes all and in which the tenant and its future administrators hold most of the aces. Typically, it is the insolvent tenant that is aware of its parlous finances and that can plan to take action to appoint administrators at the appropriate time. A landlord cannot take pre-emptive action to protect itself until the tenant is in breach of the lease, without itself risking damages claims from the tenant," he said.

As matters stand, with commercial property rent often payable on a quarterly basis, administrators can 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. Game went into administration on 26 March 2012, one day after the company's quarterly rent payments were due, with the timing meaning that administrators did not have to pay that quarter's rent despite continuing to trade from the stores.

Before the Enterprise Act came into force in 2002, whether or not rent was payable as an expense of an administration was a matter for the court's discretion based on balancing the interests of creditors as a whole against prejudice to the creditor in question. A convention developed under which most administrators would pay landlords the rent for the period during which and to the extent to which premises were used, calculated on a daily basis from the date of their appointment until the date on which the premises were no longer required. The Enterprise Act introduced a list of categories of expenditure which qualified as administration expenses, meaning that there is no longer any scope for discretion.

In the 2009 Goldacre court decision, a High Court judge found that the full amount of rent falling due during the administrators' beneficial use of the 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. However, in April 2012 the court confirmed the logical flip-side to the 'Goldacre principle', in a case involving collapsed nightclub chain Luminar. The High Court held in this case that any rent falling due before administrators are appointed must instead by classed as an unsecured debt, which will usually go unpaid, even if the administrators subsequently use the leased premises during that rent period.

"Landlords and insolvency practitioners alike acknowledge that this 'all or nothing' approach can result in unfairness to stakeholders in the administration process," said property litigation expert Dev Desai of Pinsent Masons. "Companies are often tactically put into administration immediately after a rent payment quarter date enabling administrators to use the property for that quarter without having to pay for that use."

"Conversely, at the end of an administration, the administrator is liable to pay the whole of the quarter as an expense of the administration even if the administrator only uses the property for the purposes of the administration for part of the quarter or only uses part of the property. This can result in something of a windfall for the landlord," he said.

If the Court of Appeal was to decide that Goldacre and Luminar had been decided wrongly, Desai said that it was likely to adopt the discretionary approach set out in a 1992 court decision, Re Atlantic Computer Systems Plc.

"In that case, the judge provided a clear exposition of the rescue objectives of administration as opposed to the distribution objectives of liquidation," he said. "In this context, he said that there is no place for 'hard and fast principles' concerning the payment of outgoings as expenses of administration. Instead, decisions should 'depend on all the circumstances, which will vary widely from one case to the next'."

The circumstances that the court took into account in Re Atlantic Computer Systems included the financial position of the company at the time of the application; the desired result of the administration; its prospects of success; and the overall fairness to the interests of the parties, he said.