Game Over - for tenant companies in administration
Landlords with insolvent tenants have faced serious difficulties as a result of the interpretation by the Courts of the rules for payment of rent by a company tenant in administration. This has now been put right by the Court of Appeal.
By way of background, if premises had been retained to enable the administrator to continue running the company’s business or otherwise for the benefit of the administration, then the rent is payable as an "expense" of the administration and as such is payable in priority to the claims of other creditors. Traditionally, the Court was considered to have a discretion as to the extent of the liability and to allow an administrator to pay only for the period that the premises were actually used, regardless of when the rent fell due. However, this changed with the decision in the case of Goldacre (Offices) Limited v Nortel Networks (2010), in which the Court held that there was no discretion and the whole of the rent would be payable. In the Goldacre case, the administrator was using only part of the premises. Nevertheless, the Court held that the rent for the whole of the premises was payable as an expense. While the Goldacre case was a victory for the landlord, it has not worked to the advantage of landlords in general.
It followed from the decision that, as rent is invariably payable quarterly in advance, if the premises were being used for the benefit of the administration on the quarter day, then the whole of the quarter’s rent would be payable, regardless of whether the administrator vacated part way through the quarter.
This was confirmed in the subsequent case of Leisure (Norwich) II Limited v Luminar Lava Ignite Limited (2012), which demonstrated the other side of the coin and rent which fell due on the quarter day prior to the appointment of the administrator was not payable as an expense, even though the administrator was using the premises for part of that quarter.
As a result, the timing of the appointment of the administrator had become of critical importance. If the timing of the appointment could be manipulated, so that it took place immediately after a quarter day, the administrator could obtain the benefit of the premises without payment, provided that he vacated before the next quarter day.
The potential for manipulation was demonstrated by the administration of the Game group of companies, which went into administration on 26 March 2012, significantly the day after the March quarter day. The case, Re Game Station Limited was heard in the High Court in 2013 but the Court considered itself bound by the decisions in Goldacre and Luminar and ordered that no part of the rent due on 25 March was payable. An appeal to the Court of Appeal has now succeeded and the previous decisions reversed.
According to the Court of Appeal, payments of rent are to be made for the period that the administrator retains possession of the premises for the benefit of the administration and not by reference to the days on which rent days falls due before, during or after that period. Rent will be treated as accruing from day to day and will be payable as an expense of the administration. The Court confirmed that the same principles will apply when the tenant is in liquidation.
The case marks a welcome return to the more flexible "pay as you go" approach to the payment of rent during an administration and reverses the arbitrary consequences of earlier decisions.