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No 'free' games

25 Feb 2014

The highly anticipated judgment of the Court of Appeal in the Game Group (Pillar Denton v Jervis) litigation gives valuable guidance to both landlords and insolvency practitioners on the vexed question as to when rent is payable as an expense of the administration or liquidation.

Rent quarter days have become highly significant tipping points in forcing distressed companies into a formal insolvency process. A practice has emerged where a tenant in financial difficulties – unable to pay the next quarter’s rent – may appoint an administrator immediately after the rent has become due, thereby gaining protection from enforcement action by the landlord, leaving the landlord to prove in the administration (or subsequent liquidation) in respect of the unpaid rent alongside all other unsecured creditors.

This practice gained impetus following the High Court cases of Goldacre and Luminar. In Goldacre the Judge held that rent payable in advance on the quarter dates was not apportionable under the Apportionment Act 1870, with the consequence that the rent would not fall to be apportioned should the administrators vacate the premises during that quarter.

Luminar was the corollary of the decision in Goldacre; the tenant went into administration in October 2011, having failed to pay the rent on the September quarter day. The Judge held that where rent is payable in advance and falls due prior to the commencement of the liquidation or administration, it is provable but not payable as a liquidation or administration expense even though the liquidator or administrator retains the property for the purposes of the liquidation or administration for the whole or part of the period for which the payment in advance was payable. The Judge also followed Goldacre in concluding that where rent payable in advance became due during a period in which the liquidator or administrator was retaining the property for the purposes of the liquidation or administration, then the whole sum is payable as a liquidation or administration expense even though the liquidator or administrator gives permission to forfeit or vacates before expiry of the period for which the payment in advance is due.

Luminar therefore became a factor in the timing of a distressed tenant entering into administration, in that by timing the appointment of the administrator immediately after the rent quarter date, the administrator of the tenant (or the purchaser of its business) could have “rent free” use of the premises for the remainder of the quarter, with the statutory moratorium preventing the landlord from enforcement action.

Past due - debt recovery - bought

The timing of the administration of the Game Group of companies must be seen against this backdrop. On 25 March 2012 approximately £10 million in rent became payable by Game Group in respect of the many hundreds of leasehold retail premises from which it traded. The rent was not paid and Game Group went into administration on the following day. While some stores were closed down immediately, trading continued in other stores which were included in a swift sale of the business and assets of Game Group to a new company, with the rent outstanding in respect of those transferred stores being approximately £3 million.

The issue for the Court of Appeal to decide in the Game Group litigation was the correct treatment of rent payable by a tenant that enters administration; when was it no more than a provable debt (ranking alongside the other unsecured creditors of the company) and when does it rank as an expense of the administration?

After observing that the result of Goldacre and Luminar had left the law in a very unsatisfactory state, the Court of Appeal (applying the salvage principle) held that the liquidator or administrator 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 the administration (as the case may be), with the rent treated as accruing from day to day; such 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.

For further information contact Neil Harrold
Call: 0191 232 83435
Email: neil.harrold@hay-kilner.co.uk.