Appeal Court Re-Writes Rules Relating to Insolvent Tenants

by DLA Piper
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Landlords' set to obtain "full value" as a result of re-statement of ancient equitable principle

Pillar Denton Limited and others v Jervis and others

Outline 

In a ruling relating to the stricken retailer, Game, the Court of Appeal has considerably improved the position of those landlords whose tenants go into administration or liquidation.  It decided that rents for periods in which insolvency practitioners have possession of landlords' properties should be treated as if they were expenses of the administration or liquidation.  This means that landlords are paid before the insolvency practitioners themselves.  But it is possible that the issue will be taken to the Supreme Court.

Decision

Commonly, insolvency practitioners retain possession of leased property to facilitate keeping a viable business alive in an administration or winding-up.  This is in line with the rescue culture created by the UK's insolvency law as it enables insolvency practitioners to conclude a disposal of the stricken business' assets.  However, it is now clear that such practitioners must make payments to the landlord equivalent to the rent as expenses of the administration or liquidation (which rank above the practitioners' own remuneration).  Previous decisions ruled that landlords claim to unpaid rent was no stronger than that of most other classes of creditor: this meant that landlords commonly recovered only some of the amounts due to them.

Equally, if an insolvency practitioner moves an insolvent business out of a property during a period to which a payment of rent already made in advance relates, then then an appropriate refund is due.  In either case the rent will be treated as accruing from day to day.

Facts

A large number of leases were held by the computer game retailer, Game.  On 25 March 2012 several million pounds worth of rent fell due under Game's leases.  But that rent was not paid and on the following day Game went into administration.  After that, trading continued at several Game stores which were included in a swift sale of Game's business and some of its assets.  Game's landlords argued that all the rents which fell due on 25 March 2012 were effectively expenses of the administration and so should be payable before the administrators' own fees and expenses. 

Reasoning 

  • The Court of Appeal recognised that two recent cases had "left the law in a very unsatisfactory state".
    • It was tough on insolvency practitioners.  In 2009 the High Court ruled that, if rent payable in advance fell due whilst administrators were retaining property for the purposes of an administration, the whole of that rent was payable even if the administrators gave up occupation before the end of the period to which that rent related: Goldacre (Offices) Limited v Nortel Networks UK Limited.
    • But it was also tough on landlords.  In a 2012 High Court case, it was decided that where a quarter's rent fell due  the tenant went into administration, none of that rent was payable as an expense of the administration even if the administrators retained possession of the property for the purposes of the administration: Leisure (Norwich) II Luminar Lava Ignite Limited.

It overruled both cases. 

  • The court dodged looking at provisions in the Apportionment Act 1870 which mean that the Act does not apply to rent payable in advance.  Many of the consequences of that Act still apply in landlord and tenant law: for example, unless there is an express or implied term to the contrary, a tenant who operates a break clause in a lease where rent is payable in advance has no entitlement to a rebate of rent paid in advance relating to a period after the lease comes to an end. 
  • Here, the court considered an equitable principle of insolvency law known as the "salvage principle" (also called the "Lundy Granite" principle, after leading case dealing with this area of law dating from 1870).
    • This allows the court to rule that that rent liability should be treated as if it were an expense of the administration or liquidation if it considers it just and equitable and there is a good reason to allow a landlord an advantage over other creditors. 
    • The court ruled that this principle has nothing to do with rent days and everything to do with landlords getting "full value" when their property is used by another to the other person's  advantage.  It is about "common sense and ordinary justice" and should not be affected by when the rent day happened to fall.  "Full value" is the amount of rent reserved by the lease as it accrues from day to day during the period in which an insolvency practitioner has possession of the let property.

How does this affect you?

The case has not resolved questions about how liabilities between a landlord and a tenant are to be apportioned when a lease comes to an end.  The Supreme Court may address this point if an appeal goes ahead but, in the meantime, landlords should consider amending their standard leases to cover these issues expressly and tenants need to take advice on how they can avoid being put at a disadvantage when they enter into a new lease.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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