Business Law: John Bradshaw explains a change in liability for rent during an insolvency

John Bradshaw of Barker Gotelee.

John Bradshaw of Barker Gotelee. - Credit: Archant

The recent decision of the Court of Appeal the the case of Pillar Denton Ltd and five other v Michael John Andrew Jervis, Stuart David Maddison and Game Retail Ltd is a key ruling for both landlords and insolvent companies which will have an impact on the options available to tenants in financial difficulties and the advice provided to them by insolvency practitioners.

Prior to the Game decision the general approach, in cases such as Goldacre (2009) and Luminar (2012), was that only rent falling due for payment within the period of administration was, in certain circumstances, payable as an expense of the administration.

This had the potential to produce an unsatisfactory result for landlords, tenants and/or the tenant’s creditors. Take, for example, a company which entered administration and was the tenant under a lease with rent payable quarterly in advance on a quarter day.

Under Luminar, if the administration commenced the day after the quarter day and rent was unpaid, the company would be entitled to use the premises effectively “rent free” for virtually a whole quarter. Provided the company vacated the premises prior to the next quarter day, no rent would be payable as an expense of the administration; rather it would be an unsecured claim.

Conversely, under Goldacre, if the quarter day fell within the administration period, the entire quarter’s rent which fell due during the administration would be payable as an expense of the administration even if the company in administration occupied the premises for only for a short period after the quarter day.

The Game decision by the Court of Appeal overturned the decisions in Goldacre and Luminar on the basis that they failed to apply certain longstanding equitable principles to the payment of rent. The court held that, where a company in administration uses leasehold property, rent will be due from day to day and be payable as an expense of the administration for as long as the property is used for the benefit of the administration.

This decision ought to provide greater certainty for all parties and rebalance the emphasis away from the recent focus on the timing of administration, and may lead to swifter decisions by administrators to vacate properties, particularly in situations where the benefit to the administration is not significant.

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It is not yet known whether an appeal to the Supreme Court will be considered.

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