The Court of Appeal recently handed down its eagerly awaited judgment in the case of Jervis v Pillar Denton Limited; re Game Station. The Court of Appeal has overruled the established principles set out in the cases of Goldacre (Offices) Ltd v Nortel Networks UK Ltd (in administration)  (Goldacre) and Leisure (Norwich) II Ltd v Luminar Lava Ignite  (Luminar) in relation to administration rent.
Game went into administration on 26 March 2012, the day after a quarterly rent payment date. Following the principles previously laid down in Goldacre, rent for the first 3 months after Game’s collapse was not paid by the administrators as an expense of Game’s administration. Whilst unpaid rent was provable, it was not payable as an administration expense, meaning that the administrators essentially benefitted from 3 months use of the premises without a requirement to pay rent.
A consortium of Game’s landlords, including Land Securities, Hammerson and British Land, claimed that they were deprived of millions of pounds of rent when administrators were appointed in March 2012 and challenged the High Court’s decision to uphold the principles set out in Goldacre and Luminar.
The Court of Appeal found that where an administrator or liquidator makes use of leasehold property for the purposes of an administration or liquidation then reserved rent is payable as an expense for the period during which the property is used and rent will be treated as accruing from day to day for these purposes.
The date upon which a quarter’s rent becomes due, whether it is payable quarterly in advance or in arrears under the terms of the lease, is irrelevant. This means that an administrator or liquidator will be required to pay rent as an expense based upon actual use of a property.
Game group were ordered to pay £3 million in back rent to its commercial landlords.
Lewison LJ stated within his judgment that “an 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). The rent will be treated as accruing from day to day. Those payments are payable as expenses of the winding up or administration.”
What does this mean in practice?
Whilst few are likely to argue that the decision does not strike a fair balance between the rights of landlords and the interests of creditors as a whole, the decision will certainly lead to a smaller pot of money being available for a company’s general body of creditors.
Administrators will need to be cautious before embarking on an appointment and will need to consider whether there will be sufficient funds to make an administration a workable option, with no doubt an increased and earlier focus upon the ongoing viability of a business. Concern is already being expressed in some camps as to the impact that the ruling may have upon ‘rescue culture’ and also that the ruling may lead to an increase in high street closures (with administrators being more inclined to ‘shut up shop’ in administrations earlier or opting to hold on to key units only).
Whether we will see a drop in the overall level of administrations as a result of this latest ruling – time will tell. The decision will hopefully lead to a more positive relationship between landlords and insolvency practitioners.
The final word?
A spokesman for Game has indicated that Game is considering an appeal to the Supreme Court to reverse the ruling, stating that “the ruling fundamentally changes the law in relation to the payment of rent in an insolvency context” and that “There were important principles at stake for commercial landlords, retail tenants and, indeed, any company with property assets.”
Watch this space!
For more information, help or advice please contact Andrew Cawkwell on 0191 211 7957 or one of our Restructuring and Insolvency Team.