Rent a higher priority in insolvency

• Real estate
• Real estate litigation
• Real estate sector

25-02-2014

Lawbite: Rent a higher priority in insolvency 

Pillar Denton Ltd & others v Jervis & others [2014] EWCA 180 (“Game Station”)

The outcome of this appeal has been awaited with a high degree of interest. The issue was the extent to which rent should be payable as an expense of an administration or liquidation; if it is payable as an expense, it sits near the top of the priority order for the distribution of the tenant’s assets, and will usually be paid in full.  Otherwise, it is among the unsecured debts, and the landlord will have to wait for whatever dividend is ultimately payable.

The High Court decisions in Goldacre (Offices) Ltd v Nortel Networks UK Ltd [2009] EWHC 3389 (Ch) and Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd [2012] EWHC 951 (Ch) indicated that if a rent instalment fell due prior to an administration, then no part of that rent instalment was to be payable as an expense of the administration. The upshot has been the practice of appointing administrators immediately after a quarter-day, to avoid rent being promoted up the distribution order.  In the case of pre-pack administrations, the result has often been the buyer of the business effectively enjoying three months rent-free.

The Court of Appeal has now overruled both cases; the correct principle is that an administrator or liquidator must make payments at the rate of the rent for the duration of any period during which he retains possession for the benefit of the insolvency process, the rent accruing from day to day.  Those sums are payable as an expense of the administration or liquidation.  The duration of the possession period is a question of fact and is not determined by reference to rent payment days.

The decision removes the incentive to appoint administrators immediately after a rent day.  The effect cuts both ways: if the administrator’s use of the premises ceases before the next rent-day, then there should be an adjustment in the administrator’s favour.

In any administration or liquidation which is still open, landlords who have to date not received a part of the rent because of the application of previous cases, will now be looking for payment.

The decision re-opens a possibility which was closed off by the Goldacre decision, namely that an administrator might make use of only part of the premises, and argue that only rent in respect of that part should be paid as an expense of the administration.  This might be realistic if, say, two separate warehouses were let on one lease, and the administrator shifted all the stock into one of them.  In less straightforward circumstances it might be a difficult argument to run.

The Court of Appeal’s judgment seems to anticipate a further appeal to the Supreme Court, so there may yet be further developments.