On 24 February the Court of Appeal gave judgment in the Game Station case (Jervis -v- Pillar Denton and Others). It affects the way that rent is treated in an administration.
The facts - arrears of rent on administration
When the Game group of companies went into administration, one company was the tenant of hundreds of leasehold properties under which, in most cases, rent was payable in advance on the usual quarter days.
£10 million in rent became due under the leases on 25 March 2012. The group went into administration the next day. Some stores closed immediately. Others continued trading and were included in a sale of the business and assets. £3 million of the March rent remained outstanding in respect of those stores which continued trading.
The issue - is rent to be treated as an expense of the administration?
The question was how to treat the rent which was payable under the leases when the company went into administration. Was it to be treated as an expense of the administration so that it was paid in priority to other debts of the company?
Two previous cases had decided the following:
- If, after a company had entered administration, a quarter's rent (payable in advance) fell due during the period in which premises had been retained for the purposes of the administration, the whole of that quarter's rent was payable as an administration expense even if occupation was given up later in the same quarter (example: administration begins on 1 March and premises are used for the administration; rent is payable on 25 March; premises are vacated on 20 May before the next rent is due on 24 June - the rent is payable as an administration expense for the whole of the March quarter (25 March to 23 June).
- If a quarter's rent fell due before entry into administration, however, none of it was payable as an administration expense even if the administrators retained possession for the purposes of the administration (example: rent is payable 25 March; tenant goes into administration on 26 March but the premises are retained for the administration - no rent is payable as an administration expense for the whole of the March quarter (25 March to 23 June).
As a result, it was common for companies to enter into administration on the day immediately after a quarter day. This avoided the liability to pay the rent in full for that quarter even if those leasehold premises were retained for the benefit of the administration. Effectively, the company was able to enjoy a "rent free period" of almost 3 months.
The decision - rent is to be treated as an expense of the administration
The Court of Appeal has overruled these earlier cases. An administrator must now pay rent as an administration expense for the period during which he retains possession of leasehold premises for the benefit of the administration. That rent will be payable at the rate payable under the lease and will be treated as accruing from day to day. He must pay a daily rate for that period.
Some effects of the decision
There will be on-going administrations which began before the decision in the Games Station appeal where decisions had been made on the basis of the "old law" about what rents were to be treated as an expense of the administration. In those where a quarter's rent had fallen due before the company went into administration the landlords may have been told that none of it was payable as an administration expense even though the administrators had retained possession and used the premises for the purposes of the administration. Under the "new law", those landlords might now try to recover as an expense of the administration rent at the daily rate for the period between the date that the premises began to be used for the purposes of the administration and the date when that use ceased.
Under the "new law", the "rent free" period of up to 3 months will no longer be available simply by reason of the company going into administration the day after a quarter day.
Consideration should be given as to what will amount to the retention or use of the premises for the purposes of the administration so as to lead to the rent being treated as an administration expense. For example, whilst premises may be closed and non-trading they may, for example, house machinery connected into various utility services. That machinery could be sold for the benefit of creditors, but a buyer may want to see it in operation before deciding whether or not to buy. Such a situation could well lead to rent for the premises being treated as an expense of the administration during the period that the machinery is being advertised for sale down to its removal following its sale even though the premises are closed and non-trading.
- As a result of landlords being paid in priority to other debts, the amount of any ultimate payments to unsecured creditors will be reduced.