- Fair Game - Administration Rents and Creditors' Returns
- April 23, 2014
- Law Firm: Dentons Canada LLP - Toronto Office
In recent years some high profile (and controversial) court decisions have swelled the list of liabilities that must be paid as expenses of an administration. Administration expenses enjoy "super priority", being payable out of floating charge realisations ahead of the claims of preferential creditors and floating charge holders. So, when an otherwise unsecured claim ranks as an administration expense, it clearly benefits the relevant creditor, but at the expense of the floating charge holder. It can also consume valuable resources which could otherwise be available to trade an ailing business.
Recently though, the tide has been turning. In July last year, the Supreme Court held that financial support directions, or contribution notices, issued to a company by the Pensions Regulator will rank as a "provable debt" of a company, and not as an expense of the administration.
Now, in the context of the administration of the Game group of companies, the Court of Appeal has revisited the rules on payment of rent as an administration expense. It has ruled that administrators should pay rent as an administration expense pro rata for the period that they use a property for the benefit of the administration. This is regardless of when the relevant rent payment day falls or whether the rent is payable in arrears or in advance.
Payment of rent in administration - the position before Game
Historically, where leasehold property was used for the purposes of an administration (for the benefit of a company's creditors), the equitable Lundy Granite or "salvage" principle could apply. This provided that rent attributable to the part of the property used for the period of use was payable as an administration expense. Any remaining rent due would rank as a provable debt in the insolvency process.
More recently though, two High Court decisions set some controversial "all or nothing" rules on whether rent is payable as an expense of the administration.
Goldacre (Offices) Ltd v. Nortel Networks UK Ltd related to a lease where the rent was payable quarterly in advance and the company had gone into administration before the rental payment date. The High Court held that, if the administrator causes the company to use leasehold property, the entire amount of rent that falls due under the lease is payable as an administration expense. This is the case even if the company only uses part of the leasehold property or uses the property for only a few days beyond the rent payment date. This principle provided a potential windfall to landlords (who would otherwise have to claim in the administration as an unsecured creditor).
Leisure (Norwich) II Ltd v. Luminar Lava Ignite Ltd was the corollary of the Goldacre decision. In this case the High Court ruled that a landlord could not recover, as an administration expense, rent which fell due prior to the administration (i.e. before the administrators were in office). This decision led to the arbitrary practice of appointing administrators on the day immediately following a rent payment date. This way the company (or a buyer) would benefit from a rent-free period and a greater proportion of realisations would be preserved for floating charge holders.
Administrators were appointed to the Game group of companies on 26 March 2012, the day after £10 million of rent fell due across several hundred leasehold properties. Some stores were closed immediately. However, a representative selection of the affected landlord creditors sued for the unpaid rent in respect of the properties where trading continued (amounting to around £3 million).
At first instance, the High Court in Game was obliged to follow the Goldacre and Luminar decisions, but gave leave to appeal. The Court of Appeal, bemoaning that the previous decisions had left the law "in a very unsatisfactory state", overruled both decisions. It unanimously held that the equitable Lundy Granite principle should apply (and that any reference to the Apportionment Act 1870, which only allows apportionment of rent payable in arrears, was irrelevant).
Although Game concerned an administration, the principles would also apply in a liquidation.
So, following the Game decision, rent (whether payable in advance or arrears) should be payable as an expense of the administration (or liquidation) for the duration of any period the administrator or liquidator retains possession of the property for the benefit of the administration (or winding-up). The rent will be treated as accruing from day to day. Rent falling due outside the period of "beneficial retention" will be provable as any other unsecured debt. The duration of the period during which the insolvent estate gets the benefit of the property will depend on specific facts and may give rise to questions of interpretation.
The decision may mean reduced returns for floating charge holders (because tactical timing of administration appointments can no longer engineer an effective rent-free period). However, property companies and insolvency practitioners alike have welcomed the decision, as it provides a seemingly fairer way of dealing with rents owed from a tenant in administration or liquidation.
We may not have heard the last on this issue. Although the Court of Appeal refused permission to appeal, the Supreme Court's permission to appeal has recently been sought directly.
Pillar Denton & Others v. Jervis & Others  EWCA Civ 180.