Game Over? Court of Appeal confirms rent is an administration expense

The Court of Appeal has overturned existing rules in England and Wales about administrators’ liability to pay rents falling due before their appointment.

25 February 2014

The Court of Appeal has overturned existing rules in England and Wales about administrators’ liability to pay rents falling due before their appointment.  The Court ruled that rent payable in advance will now be treated as an administration expense for the whole period of occupation of premises by administrators for the benefit of the administration.

Game's administrators sold the assets of the group, including a number of the stores, which continued to trade.  The question was whether they had to pay £3 million of unpaid rent that had fallen due for those stores.  Prior to the ruling, the appointment of the Game administrators on 26 March 2012 (the day after the rent payment day) would have allowed the administrators a rent free period until the next quarter day.  The administrators relied upon Goldacre and Luminar and did not pay any rent.  The Landlord sued the administrators for the unpaid rent.  The Court of Appeal decided unanimously that the administrators were liable to pay the unpaid rent.

The effect of Goldacre and Luminar was unsatisfactory for landlords, who could face a substantial period without rent being paid.  Timing of appointments became important in administrations if the rental obligations are significant.  This was something over which landlords would have no control.  There was also a risk for administrators; any occupation on a subsequent rent payment date would mean having to pay the rent for the whole of that period. There would be no rent reimbursement if the administrators do not occupy the premises for all of that period.

The Game ruling has now overturned this position.  The court held that rent should be treated as if it were a debt incurred by the administrator and therefore as an expense of the administration.  It will accrue on a daily basis, irrespective of the date on which rent fell to be paid.  The court disregarded the common law and statutory rules that apportionment does not apply to rents payable in advance and relied upon equitable principles.

The result will be seen as a victory for landlords.  The Court held that a strategically timed appointment of administrators would no longer provide a rent-free period.  A return to the “pay as you go” regime, which existed prior to Goldacre and Luminar, could herald a transformation in the relationship between the property industry and insolvency practitioners.  It remains to be seen whether there will be an appeal to the Supreme Court, though this may seem inevitable given the amounts at stake and the possible ramifications of the ruling.

In Scotland, the leading case on rent as an administration expense is Cheshire West and Chester Borough Council v Springfield Retail Limited (In Administration).  The case concerned liability for rent which fell due post-appointment.  The administrators did not personally use the premises for the purposes of the administration but granted a six-month licence to the purchaser of the business.  The terms of the licence required the purchaser to pay rent directly to the landlord (but contained no direct covenant with the landlord).  No rent was paid and the lease was not assigned.

The Outer House of the Court of Session held the administrators liable for rent for the whole period in question.  The court’s ruling was consistent with the Goldacre and Luminar decisions.  Interestingly, both the Court of Session and the Court of Appeal were influenced by the Lundy Granite principle referred to in the Toshoku Finance UK plc case.  An application to the Scottish courts on similar facts will be necessary before it becomes clear whether the Scottish courts will adopt the Game approach.  This is not inevitable – the Scottish rules on administration expenses are similar to their English counterparts, but not identical. It is also relevant that the equitable principles that the Court of Appeal relied upon in this case are not applicable in Scotland.

For more information, please do not hesitate to contact a member of our team.