The Court of Appeal has provided long awaited clarity on when rent will be paid as an expense of an administration or liquidation and when the landlord must submit a claim for rent as an unsecured creditor. The treatment of rent claims is important to landlords because expenses are to be paid in full, but unsecured debt claims convert to a dividend of a few pence in the pound at best in many cases.
As of 24 February 2014 landlords will be entitled to claim rent as an expense for any period when the administrator or liquidator enjoys “beneficial retention” of the premises. This is the unanimous conclusion of the Court of Appeal in Pillar Denton Ltd and others -v- Jervis, Maddison and Game Retail Limited, the Game Station decision.
The rent payable will be the rent reserved by the lease. Importantly, the amount which is payable as an expense is no longer to be determined by factors such as whether the lease requires rent to be paid in advance or in arrear or whether the premises were being used for the administration on the day when rent fell due under the lease. Instead, and subject only to the possibility of an appeal by Game to the Supreme Court, rent calculated on a daily basis for the period when the premises are being used for the administration will be payable as an expense. Rent for all other periods can be claimed as an unsecured debt, subject to the usual discount which is applied to future rents.
In many respects this is nothing new. For many years this was the practice which insolvency practitioners and landlords adopted. In so doing they applied the salvage principle which dates back to the 19th Century. All this changed in 2008 when the High Court decided in Goldacre (Offices) Ltd -v- Nortel Networks UK Ltd that the rules on apportioning rent should take priority in deciding claims for rent as an expense in administrations. That decision was followed by the High Court in 2012 in Leisure (Norwich) II Ltd -v- Luminar Lava Ignite Ltd. Those two decisions resulted in some administrators being able to trade for almost a full quarter without paying any rent (by for example putting the company into administration the day after the rent due date). Others had to pay a full quarter’s rent for trading a day or two, all because a full quarter’s rent was considered to be an expense if it was payable in advance and the administrator was using the premises on the day it fell due for payment under the lease. However, where rent was payable in arrear the Apportionment Act 1870 requires it to be apportioned on a daily basis so administrators in occupation on the quarter day paid as an expense on a daily basis.
In reaching its conclusion the Court of Appeal has expressly overruled both Goldacre and Luminar. It has determined that rent should not be treated differently from any other liability for a continuing supply simply because special rules on apportionment apply to rent.
Questions will no doubt flow as to what amounts to beneficial retention and we may see the courts engaged in answering those in future years. For now the guiding principle remains one with its origins in the 19th Century: “when the liquidator retains the property for the purpose of advantageously disposing of it, or when he continues to use it… the rent for the whole period during which the property is so retained or used ought to be paid in full”. Merely not offering a surrender is unlikely to be enough to give rise to a liability for rent as an expense. Nor is rent likely to be payable as an expense where the landlord benefits from the administrator retaining possession. The benefit must be solely for the administration. Typically this will include trading from the premises, assigning them to a company which buys the business or selling the premises on the open market.
The decision will enable insolvency practitioners to be more certain of their likely expenses. It will inevitably mean a period of wait and see for landlords as whether or not rent is an expense is a question of fact to be determined after the event. In many cases landlords will not be able to require payment in advance as they have been able to do for the last six years. There will be cash flow consequences for both sides.
With the notable exception of Game, who are considering a possible appeal to the Supreme Court, the decision has been widely welcomed by landlords, retailers and insolvency practitioners as heralding a period of closer working relations. Concerns remain that in some cases administrators may close stores earlier than they have been doing to avoid rent, but clarity on the expense position at least allows commercial entities to have sensible discussions about possible compromises.
For any further information, please contact Nicola Seager.