UK: Jervis –v- Pillar Denton Re: Games Station – Rent As An Administration Expense

On 24 February 2014, the Court of Appeal handed down judgment in the case of Jervis –v- Pillar Denton; re: Games Station which determined the scope of the "Salvage" or "Lundy Granite" principle which applied to rent becoming due during the period of Administration and overruled the cases of Goldacre (Offices) Ltd –v- Nortel Networks UK Ltd [2011] and Leisure (Norwich) II ltd –v- Luminar Lava Ignite Ltd [2013].

Background

The Court of Appeal had to determine whether part of an instalment of rent payable in advance under a lease held by a company which subsequently entered Administration should be treated as either (1) a provable debt in an Administration/Liquidation or (2) as an expense of the Administration.

The Game group entered Administration on 26 March 2012 (the day after the March quarter day) and was the tenant of hundreds of retail properties. The rent was payable quarterly in advance under the terms of all the relevant leases. The Administrators did not pay the rent but continued to trade from the properties throughout the remainder of the rent quarter, in reliance on the decisions in Goldacre and Luminar.

Goldacre

In Goldacre, it was held that if a quarter's rent is payable in advance and it fell due after the company entered Administration, then the whole quarter's rent was payable as an Administration expense provided that the Administrators continue to trade from the property – even if the Administrators gave up occupation before the conclusion of the same quarter.

Luminar

In Luminar, where the quarter's rent fell due in advance before the company entered Administration, the rent could only be provable as a debt in the Administration notwithstanding the fact that the Administrators retained possession for the purposes of the Administration.

The parties' respective positions in a nutshell

The consortium of landlords bringing the Appeal relied on the "salvage" principle and that, in effect, any persons making use of a property for the benefit of the company's creditors should pay for that use. It argued that Goldacre and Luminar should be disregarded for policy reasons.

Games Station relied on the effect of the Apportionment Act 1970 – that only rent that is in arrears and not paid in advance can be apportioned to the period of use.

Decision

In giving the only reasoned Judgment, Lewison LJ stated that he did not see why the fact that rent payable in advance is not apportionable under the Apportionment Act 1970 leads inevitably to the conclusion that the salvage principle did not apply. He stated:

"The whole of the instalment of rent that falls due is a provable debt, so the tenant remains liable to pay it. Whether that liability is satisfied by a dividend or by a payment in full is not a question of apportionment. The application of the salvage principle neither creates nor transfers any liability. What it does is to treat part of a single liability as an insolvency expense, by requiring that it be paid in full."

Accordingly, the inability to apportion rent payable in advance was irrelevant. Lewison LJ concluded:

"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".

Consequences of the decision

For an Administrator, where rent solely relates to that period during which he retains possession of the demised property for the benefit of the Administration, that rent will be payable as an expense of the Administration.

For landlords, irrespective of the date the tenant company enters Administration, the landlord should be paid in full for the period the Administrator uses the demised property for the benefit of the Administration.

Comment

This decision will be welcome news for landlords for whom the decisions in Goldacre and Luminar were of great concern. This does of course increase the burden on the Administration process with significant rent having to be paid as an expense of the Administration and so careful planning will be required when considering any administration with lease obligations. Whilst many Insolvency Practitioners had already adopted a "pay as you go" approach to rent, this decision will likely bring to the landlords a welcome end to the cyclical peaks of Administrations at around the rent quarter days.

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