Restructuring & Insolvency

Pay as you go: Court of Appeal rules insolvent tenants must pay daily rent for beneficial use of properties

The Court of Appeal makes clear in Jervis v Pillar Denton; re Games Station that liquidators and administrators alike must ‘pay as they go’ for their use of a property to the benefit of the insolvent estate, regardless of the specific terms of the relevant lease(s) relating to how and when rent is to be paid.

The Decision

The decision does little to change the practicalities of rental payments payable in arrear, but has substantially changed the position regarding payments in advance.

In addition to this, the well reported and well known cases of Goldacre (Offices) Limited v Nortel Networks UK Limited and Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd, are both overruled.

In a decision that attempts to clarify the law whilst also reaching an equitable balance of competing interests between the landlord of an insolvent tenant and the insolvent tenant’s other creditors, Lord Justice Lewison, giving the lead judgment in the unanimous decision and applying the “salvage” or “Lundy Granite” rule, held that:

  • Once an insolvent tenant enters liquidation or administration it must pay rent as an expense of the relevant process, accruing daily, for each day that it uses the relevant property for the benefit of the insolvent estate;
  • The terms of the lease that specify when rent falls due and whether it is payable in advance or arrear are irrelevant to the operation of the above principle, as is whether the due dates fall before, after or during the insolvent entity’s beneficial use of the property; and
  • The mere fact that certain periodical payments, including rent, may be provable debts within an insolvency process does not preclude such debts, or a proportion of them, being afforded priority and payable as expenses of the relevant process.

In making his determination, LJ Lewison has sought to ensure that a landlord is compensated for its often involuntary contribution to an insolvent tenant’s “beneficial retention” (as defined at paragraph 40 of his judgment) of a relevant property.

Practical effects

Subject to any appeal (which is being considered by Game) or attention by the legislator, which would seem unlikely, insolvency practitioners will no longer have to pay as an expense a full quarter’s rent when an insolvent tenant only beneficially uses a property for a matter of weeks; but neither will the insolvent tenant be able to benefit from the use of a property between quarter days whilst incurring only an unsecured liability.

In some respects the decision will be welcomed by the insolvency profession due to the clarity it appears to provide and the consequential effect such certainty has on strategic planning. Every day that the property is or may be needed, i.e. its use does or may benefit the insolvent estate, the estate must pay for its use at a daily rate that can and should be calculated as part of any strategic review of a distressed business.

However, it is equally clear that, in certain circumstances, the ruling will also reduce the number of viable options for transferring businesses and assets from insolvent entities, in some cases eliminating them. Whilst a bird in the hand has always been worth two in the bush, the decision has increased the ratio significantly in respect of distressed businesses. A would-be pre-pack purchaser offering only deferred consideration and indemnities for rent is likely to prove even less attractive than previously. This has the potential of resulting in more liquidations followed by disclaimers, but in circumstances where this suits neither the tenant nor the landlord we would expect a deal to be done.

Whilst the decision does provide clarity to some extent, disputes will still arise, as they always have, as to what constitutes “benefit” to the insolvent estate and how long an insolvency practitioner has before he must decide whether or not the insolvent tenant requires the property.

There are also clear reminders throughout the judgment and the case law relied upon by LJ Lewison that, in a pre-Insolvency Act world, a landlord that also derived a benefit from the insolvent tenant’s use of the property could not also receive payment in full from the insolvent tenant. The question of whether or not there remains scope for argument on this point in today’s times following the judgment remains unanswered.

Post Game Station, we expect that landlords will be more regularly contacted by distressed tenants and/or their advisers prior to any formal insolvencies and are more likely to be involved in strategic discussions than previously. Whilst it will remain the case that advance warnings of insolvencies will be rare, any improvement in the frequency of prior notice will be welcomed by them.

For any further information, please contact Ken MacLennan.