Rent Free Occupation during Administration!

27 Feb 2014


Update: February 2014

A Game result in respect of payment of rent as an administration expense

In Pillar Denton Ltd and others v Jervis and others [2014] EWCA Civ 180 (24 February 2014), a case concerning the administration of the Game group of companies, the Court of Appeal considered whether rent, which fell due for payment before an insolvent company went into administration, could rank as an expense of the administration.  It held that an administrator or liquidator must pay the rent arising in respect of property leased by the company, for any period during which the administrator or liquidator retains possession of the premises for the benefit of the administration or liquidation. This period is determined as a question of fact. The rent due for such period should be treated as accruing from day to day. Although the case concerned an administration, the Court of Appeal was clear that the same principles would apply in liquidation.


The Court of Appeal has therefore overruled Goldacre (Offices) Ltd v Nortel Networks UK Ltd [2009] EWHC 3389 (Ch) and Leisure (Norwich (II) Ltd v Luminar Lava Ignite Ltd [2012] EWHC 951.


Comment


The judgments in Goldacre and Luminar were in danger of distorting commercial decision-making and allowing, and indeed in some case requiring, debtors, insolvency practitioners and their advisers to make decisions as to the timing of the commencement of an administration with outcomes that would inevitably be regarded as unfair by one or more parties.
That is not to say that this case is necessarily the end of the matter: debates over the actual duration of any period of beneficial retention by an office holder will occur, and there may be instances where apportionments are less easily dealt with (such as dilapidation payment obligations, which, along with insurance and service charges, were not expressly mentioned by the court).


Another consequence of the decision is that landlords may now have unsecured claims in an administration which are also, to some extent, payable as an administration expense. Whether unforeseen complexities will arise from that, perhaps in the context of the making of distributions, remains to be seen.
The insolvency profession will now have to deal with the consequences of this decision. It is to be hoped that administrators and liquidators have reserved funds to deal with the claims which will now materialise from landlords wishing to recover, as an expense, rent which fell due before commencement of relevant administrations or liquidations.
 

May 2012

Often, the purpose of an administration can only be achieved if the company is able to remain in occupation of its premises. Typically, an insolvent company will fail to pay rent, entitling the landlord to forfeit the lease.  Recognising the importance of leasehold premises to the achievement of the purposes of an administration, Parliament specifically included a landlord's right to forfeit a lease in the scope of the rights that are suspended by the administration moratorium (paragraph 43(4), Schedule B1, The Insolvency Act 1986 (IA 1986).

In order to carry out an effective administration of an insolvent company, an administrator will incur (or cause the company to which he is appointed to incur) liabilities to third parties. The Insolvency Act 1986 requires the administrator to discharge liabilities of this kind (known as the expenses of the administration) in priority to other liabilities of the company, including the company's unsecured creditors (paragraphs 65 and 99, Schedule B1, IA 1986).

In Leisure Norwich (II) Ltd and others v Luminar Lava Ignite Ltd and others [2012] EWHC 951 (Ch), the High Court considered whether rent that fell due for payment before an insolvent company went into administration could rank as an expense of the administration. Luminar Ltd traded from a number of leasehold premises and it became insolvent and went into administration.  All the leases held by Luminar provided that rent was payable quarterly in advance. Luminar went into administration after the quarter day, without paying rent for that quarter. After going into administration, Luminar continued to occupy and trade from the leasehold premises, while the administrators marketed its business and assets for sale.

Leisure, Luminar's landlord, made an application to court under paragraph 74 of Schedule B1 to IA 1986, alleging that the conduct of Luminar's administrators was unfairly harmful to Leisure's interests. In particular, Leisure complained that Luminar was effectively occupying the premises rent-free and that, because of the statutory moratorium, Leisure was unable to forfeit the leases for non-payment of rent. Leisure sought an order compelling the administrators of Luminar to pay all the rent that was outstanding under the leases, as an expense of Luminar's administration. Leisure argued that. Luminar was using property belonging to Leisure for the benefit of Luminar's creditors and should be obliged to pay for that use.

The High Court dismissed Leisure's application and rejected Leisure's application for leave to appeal. It remains to be seen if Leisure will apply to the Court of Appeal for leave.

Comments

The Luminar decision means that, where a lease provides that a company must pay rent quarterly in advance, the administrators of that company, if appointed after a quarter day, can enjoy the remainder of the quarter in effectively rent-free occupation of the premises.

Insolvency practitioners will no doubt welcome the judgment, which provides some commercial assistance to them in carrying out their functions. Landlords will take a very different view.

In practice, it is possible that administration appointments will be timed to take effect shortly after a quarter day, to allow the administrators as long a period of rent-free occupation as possible.

The case illustrates the need to be proactive and to carefully consider timing in respect of commercial property matters

For more information, or to discuss, contact:

Philip Roberts »
Philip.roberts@ellisonssolicitors.com