A clear Judgment in favour of the landlords was handed down by the Court of Appeal yesterday in the litigation generated by the video games retailer, Game, going into administration in March 2012. This decision changes the position on the question of when rent is payable as an expense of the administration, and so in priority to unsecured debts.
One of the companies in the Game group was the tenant of numerous leasehold retail properties from which the group traded. Most of the leases provided for rent to be payable quarterly in advance on the usual quarter days, as a result of which on 25 March 2012 approximately £10,000,000 in rent became due under the various leases.
The group entered into administration on 26 March 2012. Whilst some stores were closed immediately many continued to trade in a new business which was rapidly sold to a separate company called Game Retail Limited.
At the heart of this appeal there were two recent well known High Court decisions:
- In Goldacre (Offices) Limited v Nortel Network UK Limited (2009) the Court found that if a quarter’s rent payable in advance fell due during a period in which the administrators were retaining the property for the purpose of the administration, then the whole of the quarter’s rent was payable as an administration expense, even if the administrators were to give up occupation later in the same quarter.
- In Leisure (Norwich) II Limited v Luminar Lava Ignite Limited (2012) the High Court decided that where a quarter’s rent payable in advance fell due before entry into administration none of it was payable as an administration expense, even if the administrators retained possession for the purposes of the administration for the whole of that quarter. In those circumstances rent was simply provable as a debt in the administration.
The consequence of those two decisions was that it became increasingly common for companies to enter into administration on the day immediately after a quarter date, thereby avoiding liability to pay the rent in full even if they retained possession of the leasehold property for the whole of that quarter.
Lord Justice Lewison, in a very clear judgment, overturned both the above decisions by applying the well-known “salvage principle” and making it clear that the application of that principle and the right of a creditor to prove for a debt in the insolvency were not mutually exclusive.
The salvage principle has its basis in cases dealing with a landlord’s right to levy distress on goods following on from the liquidation of the tenant. The principle is well expressed in the case of Re Lundy Granite Co [1870-1871] in which James LJ stated:
“but in some cases between the landlord and the company, 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. He must have the same rights as any other creditor, and if the company choose to keep the estates for their own purpose, they ought to pay the full value to the landlord, as they ought to pay any other person for anything else, and the Courts ought to take care that he receives it”.
Over subsequent years this principle was gradually extended by the Courts beyond the narrow confines of distraint.
The Court of Appeal in Game set out their views clearly, stating that it must be remembered that the salvage principle is based in equity and not common law. As such, the relevant insolvency office holder must make payments at the rate of the rent due under the lease for any period during which he retains possession of the demised premises for the benefit of the winding up or administration. That rent will be treated as accruing from day to day, and 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.
It will be interesting to see whether this issue goes to the Supreme Court, given the significant impact that it will have on the conduct of administrations. However, for the moment at least the position seems to be clear and considerably fairer.
The Scottish courts considered for the first time the question of the payment of rent as an expense of an administration in Cheshire West and Chester Borough Council in the Administration of Springfield Retail Limited . The court held (following the decision of the English courts in the case of Goldacre) that rent in respect of the period during which the third party occupied the property in terms of the licence should be paid as an administration expense. It is therefore anticipated that The Court of Appeal decision in Game will be followed in Scotland.
In Scotland, the landlord should consider exercising his hypothec which is the landlords' right in security over moveables on the premises (such as stock and fixtures and fitting). The landlord has a preferential claim in the insolvency if they exercise the hypothec. The hypothec covers arrears of rent due but unpaid.
The case is fully reported as Re Games Station Limited (Jervis –v- Pillar Denton Limited)  EWCA Civ 180.