Kate Andrews comments on the Court of Appeal Game case26th February 2014
Property ligitgation partner Kate Andrews considers the recent developments in the Landlords case agains Game Station.
2 weeks ago the Court of Appeal heard the long awaited appeal in Jervis and another v Pillar Denton Limited (Game Station) and others, better known as the Game Station case. The decision was handed down by the Court of Appeal on 24 February 2014 and will change to the way in which rent in administration is treated.
Before the Court of Appeal’s ruling, by virtue of the well-known cases of Goldacre and Luminar, where rent is payable in advance (which is usually the case) and an administrator is appointed after the rent date has passed, the outstanding rent was deemed to be an unsecured debt and the landlord would rank amongst the company’s unsecured creditors. Consequently, the landlord was highly unlikely to recover the entire sum he was owed. To compound the situation, the Administrator would be entitled to make use of the premises until the next rent date without having to pay a penny to the landlord.
On the other hand, the position was if an Administrator was appointed before the rent fell due, and was still in occupation when the next rent day came around, the rent was treated as an expense of the administration and therefore paid in priority to other debts of the company.
Game Station appointed administrators on 26 March 2012 (the day after the March quarter day). In reliance on Goldacre and Luminar, the Administrator refused to pay the rent which had fallen due before his appointment but continued to trade from the property rent free until the next quarter day. The Administrator’s actions, which from the landlords’ perspective seemed rather unjust, were upheld by the High Court in 2013. However on the basis that the issues involved were likely to be of general concern to administrators, landlords, and other professions alike, permission to appeal was granted.
During the two day Appeal hearing, a consortium of landlords argued the court should apply the Lundy Granite principle i.e. that any person making use of a property for the benefit of the company’s creditors should pay for that use, to rent payable in advance. In support of this proposition, the landlords suggested the court should deviate from Goldacre and Luminar for policy reasons, as the current law provides an incentive to (a) administrators to rush appointments to avoid hefty rent payments; and (b) company directors to delay administration to side step a payment to the landlord, thereby prolonging the trading life of the company with a real risk that it will not be able to pay the additional debts it incurs during that prolonged period.
In reply, Game Station relied heavily on the effect of the Apportionment Act 1870, i.e. that only rent which is payable in arrears can be apportioned to the period of use. Further it submitted that landlords are not disadvantaged under Goldacre: if they chose to negotiate and enter into leases where rent is payable in advance they must reap the consequences. In response to the policy issues, Game Station’s stance was that such concerns were unfounded as it was unlikely that directors or administrators would act in such a cavalier fashion and in clear breach of their respective duties.
Unsurprisingly, the court decided to reserve judgment and that long awaited decision has now been handed down in favour of the landlords who will now be able to recover around £3 million of unpaid rent from Game Station Limited. The Court of Appeal found that rent must be paid for period of time that the administrator retains the property for the benefit of the administration. It also stated that the rent will be treated as accruing from day to day and those payments are payable as expenses of the administration. The Court of Appeal also agreed that it followed, as a consequence, that Game’s cross-appeal should be allowed and found that any rent payable in advance falling due during the period when administrators are in possession must be apportioned so that the amount of rent due was for the period that the premises were used by the administrator for the benefit of the administration.
The decision will have a widespread impact on landlords, insolvency practitioners, creditors and buyers of distressed businesses. It will be interesting to see how, and to what extent, market practices change in response to the decision over the next few months including how rental payments will be made, recovered and apportioned in practice. For administrators it will see a subtle shift in how they plan the business as rent payment dates become tactically irrelevant.
If you would like to discuss any of the issues raised in this article please contact Kate Andrews