The Game is afoot

The new ‘pay-as-you-stay’ rule, which forces administrators using premises for the benefit of an administration to pay landlords rent at a daily rate, looks set to be settled law for the foreseeable future.

This follows the Supreme Court’s refusal to reconsider the Court of Appeal’s decision in Pillar Denton Limited & others v (1) Jervis (2) Maddison and (3) Game Retail Limited [2014] EWCA Civ 180. Nevertheless, the game may not be up for administrators. The judgment does not address key questions about how such rent should be calculated in practice, potentially leaving administrators scope to argue for lower payments.

Closing the loophole

Before the court’s finding in Game, an administrator could take over an insolvent company’s premises rent-free. That effectively generated a substantial windfall for a subsequent purchaser of the business.

The earlier cases of Goldacre (Offices) Limited v Nortel Networks UK Limited [2009] EWHC 3389 (Ch) and Leisure Norwich (II) Limited v Luminar Lava Ignite Limited [2012] EWHC 951 created that often lucrative loophole. Those judgments held that an administrator was not liable to cover a payment of rent in advance which had been missed just before the company went into administration. There was not even an obligation to pay the missed rent where the administrator occupied the company’s premises and continued trading during the period the missed rent related to; the landlord could only recover the unpaid rent by proving it in the insolvency alongside the company’s other creditors.

As a result, failing tenants were known to deliberately appoint administrators just a day or two after their quarterly rent was due, so the administrators were spared that expense for the following three months. Landlords, however, were left out of pocket because the company inevitably had insufficient assets to repay all of its creditors in full.

Game redressed this perceived anti-landlord bias. Lord Justice Lewison, giving the leading judgment, traced back the authorities on realising property in insolvency to the salvage principle in Re Lundy Granite Co; ex p Heavan [1871] LR 6 Ch App 463.

That case made clear the salvage principle was firmly rooted in equity, not common law, a point which subsequent case law lost sight of over time. As such, the judge held that while rent is a provable debt, the salvage principle could intervene, allowing the courts to order that administrators must pay rent for each day they are in occupation as an expense of the administration. He referred to such payment as being consideration for the insolvent company’s “beneficial retention” of the premises and unrelated to dates on which rent payments fell due under the relevant lease.

Unanswered questions

The Supreme Court’s refusal of permission to appeal on 31 October 2014 undoubtedly means landlords are more likely to recover rent that their commercial tenants failed to pay shortly before they entered into administration. However, the detail of how this newly-resurrected salvage principle will apply in practice is less clear.

What constitutes “beneficial retention” of premises is clearly a question of fact. There is still room for administrators to argue that their physical occupation of the property was not actually beneficial to the insolvency. Such a position would rely on the interpretation of Lewison LJ’s choice of terminology as indicating that the calculation of rent payable is based on the benefit accrued by the administration – and not on the landlord’s loss.

Another obvious matter not dealt with by the court is how the level of rent should be calculated: if any measure is founded in equity, then should the rent payable be the current market rate rather than the rate set out in the lease? Further unresolved issues not specifically mentioned in the judgment include whether an administrator should be responsible for dilapidations payments and other obligations that may arise under the lease.

The impact of Game is likely to be greatest in the retail sector, where the benefits of an insolvent company continuing to trade tend to be highest, and where rents are also substantial. Removal of the possibility of a rent-free window and further uncertainties over rent levels and liability for dilapidations may mean administrators are increasingly cautious and close more stores at an earlier stage.

Certainly the Supreme Court’s decision is not the conclusion of this matter. Further litigation over the practical application of the Game judgment is likely. SJ

Sri Carmichael is a barrister practising from Hardwicke