Rent as an expense of the administration

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The Court of Appeal has delivered its judgment in the eagerly anticipated Game [1] administration on the treatment of rent payable under a lease held by a corporate tenant that enters administration. When is the rent no more than a provable debt; and when does it rank as an expense of the administration?

The position prior to the Court of Appeal decision on 24 February, was following Goldacre [2] and Luminar [3], that rent payable in advance and which fell due before the appointment of an administrator was not considered an expense of the administration, but where the rent fell due during a period when the administrator was occupying the property for the purposes of the administration, then the whole sum ranked as an administration expense.

In the Game administration, the Game group had gone into administration the day after the March quarter day. Rent was payable in advance under various leases. The administrators did not pay rent for the remainder of the quarter notwithstanding their occupation of the premises. Applying Goldacre and Luminar, the High Court ordered that the arrears of rent falling due before the date of the administration were not an administration expense and ranked as unsecured claims while the rent falling due during the course of the administration was payable as an administration expense.

It will not come as a great surprise that the Court of Appeal has overturned the High Court decision and with it Goldacre and Luminar. The Court of Appeal has said in clear terms that where an administrator – or liquidator – uses leasehold premises for the purpose of the administration – or winding up – then the rent will be treated as an expense of the administration for the period during which the premises are so used and it is immaterial for these purposes whether the rent is payable in advance or in arrears.

It is therefore irrelevant whether the date upon which the quarter’s rent falls due falls before or after the commencement of the administration.

The decision is a sensible one and should also mean the end of some of the tactics surrounding appointments – the quarter date had assumed unwarranted importance in the timing of administrations. However, the decision will have an impact on existing administrations. Some administrators will have been reserving for rent on a period of occupation basis, even if they were appointed after the quarter date, in anticipation of the Court of Appeal overturning Goldacre and Luminar. Others, however, may not have done so and they will need to address the implications of the Court of Appeal decision as a matter of urgency.

Finally, the decision was concerned with an administration. However, the leading judgment makes the point that 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)” (our italics). So, in the Court of Appeal’s view the principle applies equally to winding ups as to administrations. However, it is arguable that as the court was not dealing with a winding up, the comment is of persuasive rather than binding authority only.

[1] [2014] EWCA Civ 180
[2] Goldacre (Offices) Ltd v Nortel Networks UK Ltd (In Administration) [2009] EWHC 3389 (Ch) [2010] Ch 455
[3] Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd (In Administration) [2012] EWHC 951 (Ch) [2012] 4 All ER 894