Court of Appeal reaches decision in Game

Today the Court of Appeal handed down its decision in the appeal of a group of landlords of stores occupied by the collapsed Game group on the issue of when rent must be paid by administrators as an administration expense, in a long-awaited challenge to the controversial case law established by Goldacre and Luminar.

The Decision

The Court of Appeal has overruled Goldacre and Luminar in a decision that seizes upon the opportunity afforded to set a more level and arguably fairer playing field for landlords and insolvency practitioners alike, by ordering the payment of rent on a day by day basis, as an administration expense.  In reaching the decision, Lord Justice Lewison commented that Goldacre and Luminar had left the law in an unsatisfactory state.  He could not see why common sense or ordinary justice should be defeated by the fact that a rent day occurs immediately before the date of entry into administration.  Equally, it would be inequitable to require a landlord to be paid rent in full for a period after the insolvent tenant has vacated the premises, leaving the landlord free to re-let them.

This decision will be hailed by landlords, and recognised by insolvency practitioners, as a fairer outcome for several reasons.  First and foremost, it will mean that an insolvent tenant will no longer obtain a rent-free quarter by strategically timing the appointment of administrators to take effect immediately after the quarter day on which rent payable in advance is due (as was the case in the Game administration).  Secondly, this decision will mean there is less risk for landlords when an insolvent tenant enters administration and hence may avoid the need for landlords (when entering or renewing a lease) to insist upon guarantors or larger rent deposits, which could have cash flow implications for struggling tenant companies.  Thirdly, insolvent tenants will benefit from the fact that they will not be liable for a full quarter’s rent where they vacate the premises ahead of the next quarter day.

However, the decision is not entirely problem-free.  Whilst the law as it stood under Goldacre and Luminar was not favourable to landlords, it should be remembered that landlords are only a single group of creditors in any administration and a rent-free quarter may have assisted administrators in achieving the statutory purpose of administration, which would clearly be more beneficial to the body of creditors as a whole.  Further, the costs of administration may increase and administrators will need to undertake a balancing exercise from the outset as to the use of any premises to achieve the statutory purpose versus the associated cost of doing so.

Background to the Decision

To recap, in Goldacre (Offices) Ltd v Nortel Networks UK Ltd (In Administration) [2009] EWHC 3389 (Ch) the High Court held that rent falling due after the appointment of administrators ranked as an administration expense, assuming the administrators were occupying the premises for the benefit of the administration during that period.  The full rent for the period was due, regardless of how long the administrators actually intended to use the premises for, or even if only part of the premises was being used.  The principle was endorsed in the subsequent case of Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd (In Administration) [2012] EWHC 951 (Ch) with the High Court confirming that rent falling due prior to the commencement of an administration was never payable as an administration expense, regardless of whether the company in administration continued to use the premises for the remainder of that quarter.

Game group is a high street retailer of computer games which traded from a number of leasehold stores with a £12 million quarterly rent bill. When Game entered administration in March 2012, the administrators were appointed immediately after the rent quarter date on which rent fell due.  The timing of the administrators' appointment meant that, applying Goldacre and Luminar, the landlords' claims for substantial sums of rent would constitute only unsecured claims (and therefore be unlikely to be paid in full, if at all).

In July 2013, Game's administrators applied to the High Court for directions on the rule established in Goldacre and Luminar.  The Court held that it must follow Goldacre and Luminar.  However, a consortium of landlords (who had been left out of pocket by the application of the Goldacre rule) successfully obtained permission to appeal on the basis that the issue was of importance to landlords and administrators generally and the sums involved in the Game administration were substantial (Re Games Station Ltd (also known as Jervis v Pillar Denton Ltd) [2013] EWHC 2171 (Ch)).

If you would like any further information, please contact Tim Carter, head of the insolvency and restructuring group, on 01483 734248 or tim.carter@stevens-bolton.com

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