The UK Court of Appeal has swept aside existing rules governing when administrators have to pay advance rents falling due before their appointment.
In what will be seen as a significant victory for landlords, the Court held on 24 February 2014 that it was not open for administrators to enjoy a rent free period simply because they were appointed just after a quarter day. The decision will have major implications for the planning and implementation of corporate insolvencies and looks set to transform the relationship between insolvency practitioners and the property industry.
The Court had to consider whether the administrators of the Game group had to pay rent as an “expense of the administration” in priority to other debts. The retailer had over 600 stores and quarterly rents of about £10 million when it went into administration. It failed to pay rent due on the March 2012 quarter day and appointed administrators shortly afterwards.
Game’s administrators quickly sold the business and assets of the group, including a number of the stores which continued to trade. The question was whether they had to pay about £3 million of unpaid rent that had fallen due for those stores. The Court of Appeal decided unanimously that they did. In reality, the buyer of the business will have to pay the rent as it reportedly indemnified the administrators against this liability.
In reaching its decision, the Court overturned earlier case law that has dictated the relationship between landlords and insolvency practitioners throughout most of the latest economic downturn. In 2009, Goldacre was viewed as a landlord friendly decision as it confirmed that administrators were required to pay in full quarterly rents falling due after their appointment where they were using the property on the quarter day.
The case has since become something of a poisoned chalice for landlords. As was subsequently confirmed in the 2012 Luminar decision, Goldacre meant that advance rent falling due prior to the appointment of administrators was not treated as payable as an expense, even where property was used for the remainder of the quarter. Landlords have complained about the seemingly deliberate timing of appointments around rent days to avoid payments and have called for a return to the “pay as you go” regime previously adopted.
Lord Justice Lewison, giving the leading judgment, said that the earlier cases had “left the law in a very unsatisfactory state“. Instead, His Lordship said that administrators and liquidators “must make payments at the rate of the rent for the duration of any period during which [they] retain possession of the demised property for the benefit of the winding up or administration. 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“.
Pithily summing up the position, he said that administrators “can’t have the penny and the bun“.
The result is that administrators will no longer be able to plan for a rent free period during which landlords are kept at bay whilst a business is sold. Yet the decision cuts both ways: administrators will not have to pay an entire quarter’s rent in advance where they happen to retain premises on the rent day but vacate part way through the quarter.
The decision represents a major shift and return to the position that was thought to apply before Goldacre. We are unlikely to have heard the last of this issue. Even allowing for the time it will take for all the practical consequences to be worked through, an appeal to the Supreme Court may seem inevitable given the amounts and the principles at stake.