• Game Over? Court of Appeal has a Kick-about with Game Administration
  • March 7, 2014
  • Law Firm: Dentons Canada LLP - Toronto Office
  • The case concerning the Game group of companies' administration has now been played out in the Court of Appeal and the eagerly anticipated judgment has been handed down.

    The issue at stake concerned a landlord's ability to recover rent as an expense of administration (and therefore payable before other creditors) where such rent is payable in advance but where the tenant's administration occurs immediately before a quarter day's rent falling due.

    The Court of Appeal overruled the decisions in Goldacre and Luminar and held that rent should be paid as an expense of the administration for the period of use of the property by the administrator for the purposes of the administration, regardless of when the rent fell due.

    In the lower league High Court case of Goldacre it was held that a landlord would be entitled to a full quarter's worth of rent as an expense of the administration where the administration occurred before the quarter day. This was the case even if the administrator did not use the whole of the property during the quarter and ceased to use the property for the purposes of the administration during the quarter.

    On the face of it, this was a good result for landlords. However, the High Court decision in Luminar effectively confirmed that, if a company entered administration immediately after a quarter day and had not paid the rent, the administrator would not be liable to pay any part of that quarter's rent as an expense of the administration. This therefore provided a breathing space for the administrator during that particular quarter to manage portfolio formations.

    It came as little surprise that most companies with large property estates entered administration immediately after the rent quarter day - a spectacular own goal. In these circumstances, whilst a landlord would still be entitled to its claim as an unsecured creditor in the administration, this clearly is of little comfort where the company is insolvent with little prospect of any significant payment being returned to unsecured creditors who are low down in the waterfall rankings.

    These two High Court cases generated much friction between landlords and insolvency practitioners. On the one hand its seemed iniquitous that administrators should be able to cause a company to continue to trade out of a property without paying rent, whilst on the other hand if an entire quarter's rent must be paid as an administration expense many administrations that could save jobs and preserve value could fail.

    In the Game case, the Court of Appeal overruled these two decisions as opposed to allowing either landlord or insolvency practitioner 'the penny and the bun'. The court held that the 'salvage principle' was sufficiently equitable in nature to allow a landlord to recover rent as an expense of the administration for the period of beneficial retention of the property, but no more. Similarly, the principle is such that the administrator is obliged to pay the landlord for rent due where the administration occurs prior to a rent quarter day. The court held that, during the period of beneficial retention of the property, rent is payable on a day-by-day basis.

    The aim of the court's decision is to strike a balance between the landlord's and the administrator's respective interests and provide a clear solution to the problems created by Goldacre and Luminar. The court has avoided declaring that either landlords or administrators are the outright winners of the Game case, instead adopting a 'prizes for all' approach to better reflect the factual reality of administration and a move away from the legal gamesmanship that had evolved out of the Goldacre and Luminar decisions.

    The decision also confirms that, in respect of the period of beneficial retention, the principles apply equally to liquidation as they do to administration.

    What was not addressed in the judgment is the issue of whether an administrator is obliged to pay a full rent if it only beneficially retains part of a property. Therefore, there is scope for further argument on this point. Applying the logic of Lewison LJ, it would seem that the court would adopt a just and equitable approach to this question and, if the unwanted part of the property was sufficiently severable, it is quite possible that the court would apportion the rent between what is payable as an expense and what falls as an unsecured debt. If however the occupation of part meant that no-one other than the administrator could use the property, it is unlikely that the court would so apportion how the rent should be paid.

    Whether the decision means that it is all over remains to be seen. Even if it were odds-on for extra time on appeal, Lewison LJ's leading judgment is detailed and considered and one that is squarely aimed at achieving an equitable and just result. With the March quarter day looming, landlords and insolvency practitioners will both now have to consider their strategies in light of the decision and any possible appeal. A important match has been played out in the top-flight arena of the Court of Appeal and a result has been achieved. However, the post-match analysis and debate is likely to continue for some time.