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The next chapter in the Game litigation and rent as an expense of the administration

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06/06/2014

In contrast to non-solvency non-payment of rent, where the landlord is entitled to recover the whole quarter’s rent payable in advance whether or not the forfeiture occurred before the quarter ended, in insolvency situations, the landlord must prove for rent he is owed.

In 2009, the Goldacre case [1] decided that where administrators continued to trade for the benefit of the company’s creditors from the premises on a rent payment date, the whole of the rent for that period was payable as an expense of the administration, even if the administrators vacated the premises before the next payment date. Landlords welcomed the decision given the growing number of administrations where the administrators continue trading from premises pending a sale to sell off remaining stock.

In the later case of Norwich v Luminar Lava [2] the High Court held that rent payable in advance, which fell due before the commencement of an administration, was not payable as an administration expense even if the administrator stayed in possession of the premises for the purposes of the administration. Instead, the landlord would have to prove for the unpaid rent as an unsecured creditor. Luminar distinguished Goldacre and restricted expenses of the insolvency process to those that were incurred after the commencement of the process. It led to unsatisfactory situations where administrators could make tactical decisions to enjoy the remainder of a quarter in rent-free occupation of the premises if they timed the appointment after the quarter day.

Post-match analysis of the Game

Game went into administration a day after the quarter day on which rent was payable in advance under various leases it held. The administrators sought directions from the court [3] on, amongst other things, how to treat the rent in relation to one leased property which was occupied by the administrators for five days after the administration commenced to remove stock from the premises.

The historic case of Re Lundy [4] introduced the Salvage Principle; if a company remains in possession of premises to its commercial advantage, preventing the lessor from obtaining possession, “common sense and ordinary justice require the court to see that the landlord receives the full value of the property”.

In the Court of Appeal, the landlords argued that equity required the Salvage Principle to apply as a gloss to the Insolvency Rules in order to give the landlord full value of the property which he is prevented from possessing.

In a common sense judgment, the Court of Appeal agreed with the landlords, allowing the Salvage Principle to apply to obligations that have technically fallen outside (before) the start of the administration/insolvency process to be recovered as an expense of the administration (although this should not apply until the administrator has actually retained possession of the premises for the benefit of the administration). The period of that beneficial possession was a question of fact, the rent being treated as accruing from day to day.

Comment

After the unsatisfactory outcome in Luminar, landlords may have thought it necessary to consider limiting their exposure and move towards monthly rents to avoid a situation where the administrators could occupy the premises rent free if appointed shortly after the quarter day. This should now not be necessary. Pillar Denton requires administrators to ensure that they have funds to deal with landlords wishing to recover as an administration expense, rent which fell due before they were appointed.

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[1] Goldacre (offices) Ltd v Nortel Networks UK Ltd [2009] EWHC 3389 (Ch)
[2] Leisure (Norwich (II) Ltd v Luminar Lava Ignite Ltd [2012] EWHC 951
[3] Pillar Denton Ltd and Others v Jervis and others [2014] EWCA Civ 180
[4] Re Lundy Granite Co ex parte Heavan (1870-71) LR 6 Ch App 462

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