The rental game: Pillar Denton v Game Retail

The rental game: Pillar Denton v Game Retail

Partner and Head of Insolvency, Steve Dillon, takes a look at what affect the Game decision in the Court of Appeal (Pillar Denton and others v Game Retail Limited and others) will have on both landlords and administrators/liquidators.

This case overturns existing law on the treatment of rent as an expense of formal insolvency processes. In particular, Goldacre (Offices) Limited -v- Nortel Networks Limited and Leisure Norwich (2) Limited and others v Luminar Lava Ignite and others.

Expenses: the decisions in Goldacre and Luminar

In Goldacre (decided in 2009) and Luminar (decided in 2012), the High Court considered the relationship between landlords and administrators/liquidators of insolvent tenants.

It was (and remains) settled law that if an administrator/liquidator uses leasehold property for the purposes of the insolvency then rent should be payable as an expense of that insolvency. The question for the High Court in both Goldacre and Luminar was the amount or, more particularly, the period for which rent is payable as ‘an expense’ of the insolvency. From a landlord’s perspective this is an important question. Rent payable as an expense of the insolvency will rank in priority alongside the fees of an administrator/liquidator and so will be much more likely to be paid when there are monies available to pay out of the insolvency. Otherwise, rent is an unsecured debt and a landlord ranks alongside the other unsecured creditors (and behind the administrators/liquidators).

In Goldacre, the Court decided that the full amount of any rent that fell due under the lease during a period in which an administrator/liquidator was using the premises was payable as an expense of the insolvency. So if, under the terms of the lease, the rent is payable quarterly in advance during an ‘expense’ period then the court treated the entirety of that quarter’s rent as an expense of the insolvency -- even if the next day the administrator/liquidator stopped using the property for the benefit of the insolvency.

At first blush, the Goldacre decision was helpful to landlords but there were two obvious questions. What happens if an administrator/liquidator ceased using the property for the benefit of an insolvency the day before rents fell due? And what happens if the rent falls due the day before a company enters an insolvency process even if, immediately upon appointment, an administrator/liquidator uses the property for the benefit of the insolvency?

The decision in Nortel clarified the position. The High Court felt that it was a natural extension of Goldacre that, if an administrator/liquidator stopped using the property for the insolvency before the rent fell due, then that rent was not payable as an expense. If the rent fell due before the insolvency started (or the property began to be used for the benefit of the insolvency), then that rent was an unsecured debt.

The decisions in Goldacre and Luminar were a problem for landlords. It was the administrator/liquidator who was usually in control of when the tenant entered an insolvency process and in control of when it began and ceased using the leased property for the benefit of the insolvency. As a result it became fairly common for administrators/liquidators to be appointed the day after a quarter’s rent fell due; then use the premises for just short of three months for the benefit of the insolvency; and then stop using the property for the benefit if the insolvency before the next quarter’s rent fell due. In that scenario none of the rent would have been payable as an expense.

The game changer

The Court of Appeal was asked to re-examine the issue by the parties in Game and delivered its judgment on 24 February 2014.

In a detailed leading judgment, Lord Justice Lewison explored the rationale behind payment of rent as an expense. He concluded that the ‘Salvage Principle’ on which it was based is a equitable doctrine rather than a principle concerned with the common law and the contractual timing of a due payment. It was fair to ensure that full value of a property is given to a landlord who is denied use of his property because  an administrator/liquidator is using it in the course of his office. As Lewison LJ put it in Game, the administrator/liquidator can't have “the penny and the bun”.

Lewison LJ summed up his decision when he said: “The true extent of the principle, in my judgment, is that the office holder must make payments at the rate of the rent for the duration of any period during which he retains possession of the demised property for the benefit of the winding up or administration (as the case may be).

“The rent will be treated as accruing from day to day. Those payments are payable as expenses of the winding up or administration. The duration of the period is a question of fact and is not determined merely by reference to which rent days occur before, during or after that period.”

Impact of the decision

The Game decision would appear to bring about a fairer result and better balance between the interests of administrators/liquidators (and their creditors) on the one hand and landlords on the other. Landlords will receive rent as an expense of an insolvency for the number of days that the administrators/liquidators use the property, regardless of when rent may fall due contractually.

But the Game decision appears to affect much more than the rent that is due under a lease. If the administrators/liquidators are using the services available at a property (for which there is a service charge reserved as rent under the lease) then an appropriate proportion of the service charge ought to be an expense. This could also apply to an insurance rent or other sums reserved as rent under the lease.

This risk may even extend to dilapidations/disrepair. Quite often a landlord’s costs of remedying disrepair and dilapidations are reserved as rent. Canny landlords may serve large schedules of dilapidations arising from inspections conducted during the period that administrators/liquidators are using their property. They would argue that the costs of remedial works ought to be paid as an expense. Sensible administrators/liquidators would be well-advised to get a schedule of condition as early as possible during their period of office. This can protect against claims arising from disrepair to the property accruing many years before their appointment.

Whilst more litigation may follow over other specific charges due under a lease amounting to insolvency expenses, the clarity provided by Game should now see administrators/liquidators taking a more calculated view as to whether to use a landlord’s property and/or hand the property back at the earliest stage possible.

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