The Court of Appeal has now ruled that administrators are bound to pay rent as an expense of the administration for the whole period that they are causing the company to use the property, regardless of when the rent fell due under the lease.

Introduction

For quite some time landlords have been in an impossible position when their tenants have gone into administration. This is because the effect of recent case law has made it common for companies to enter into administration the day after a rent quarter day, thereby effectively avoiding liability to pay rent even if they remain in occupation of the property. If the company was sold quickly then this would mean in effect that the new company could trade for free for the first three months.
The Court of Appeal has now ruled that administrators are bound to pay rent as an expense of the administration for the whole period that they are causing the company to use the property, regardless of when the rent fell due under the lease.

Background

Readers of our Real Estate Bulletin may recall that back in March 2012 we wrote about the unsatisfactory state of the law in this area. In summary, the position was as follows:

  • When a tenant goes into administration a moratorium comes into effect which prevents any enforcement action being taken against it by the landlord for rent arrears and prevents a landlord forfeiting the lease without the permission of the administrators or the Court.
  • Administrators are obliged to treat some debts as expenses of the administration others will just rank as an unsecured debt.
  • Where rent fell due under a lease after a tenant had gone into administration and the administrators retained the property for the purposes of the administration then the entire quarter's rent was payable as an expense, regardless of whether the company had vacated the property before the end of the quarter.
  • The corollary of that was that rent payable in advance and falling due before the start of an administration could not be payable as an administration expense, even if the administrator caused the tenant company to use the property for the purposes of the administration for the whole or part of the period to which that payment related.

The facts

This "all or nothing" approach led to companies entering in administration on strategic dates designed to avoid having to pay a whole quarter's rent.

In Pillar Denton Ltd v Jervis [2014] EWCA 180, one of the companies in the Game Group, which was the tenant of hundreds of retail properties entered into administration on 26 March 2012. This was just one day after approximately GBP 10 million in rent had fallen due under its leases. Some stores closed down immediately but some stores continued to trade and the administrators sold the business and many of the company's assets to Game Retail Limited on 1 April 2012. By the time that the case got to the Court of Appeal £3 million in rent was still outstanding.

The decision

The question for the Court was when does rent rank as an expense of the administration and when is it no more than an unsecured debt? The Court of Appeal found as follows:

  • The administrator must make payments at the rate of the rent for the duration of any period which the administrator causes the company to retain possession of the property for the benefit of the administration (or winding up, as the case may be). This is called the "salvage principle" and restores the position to what it was prior to the most recent case law.
  • The rent will be treated as accruing from day to day and will rank as an expense of the administration.
  • The duration of the period for which rent is payable will be a question of fact as to whether the administrators are using the property for the purposes of the administration and will not be determined merely by reference to when rent days fall and whether this is before or after the tenant company enters administration.

Conclusion

The restoration of the "salvage principle" will be most welcome by landlords who will now at least be paid in full for the period that the property is being used.

To assist in any factual argument as to the period for which the administrators were using the property for the benefit of the estate, we would recommend writing to administrators immediately on their appointment, stating your belief that they are in beneficial occupation. If appropriate, it may also be advisable to demand permission to forfeit the lease, as the administrators' refusal of this request would be clear evidence of their use of the property.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.