Following the recent years of dissatisfaction with the law on the parts of both landlords and Insolvency Practitioners, the Court of Appeal has recently clarified the law as to what rent landlords of tenants in administration (or liquidation) can claim as an expense of the administration.
This is an important issue because under the Insolvency Act 1986, expenses properly incurred by the administrator in performing his functions may be paid ahead of preferential creditors, such as employees, floating chargeholders and unsecured creditors. It is a huge advantage.
In the case of Pillar Denton Limited and Others –v- Jervis and others  EWCA Civ 180 the Court was asked to answer the question- when is the rent no more than a provable debt and when does it rank as an expense of the administration?
On 26 March 2012, the Game group of companies went into administration. It was not a coincidence that £10m in rent had fallen due on the previous day. Most of the unpaid rent related to tenancies under which the rent was payable quarterly in advance on the usual quarter days. Some stores were immediately closed down, whilst others remained open and were included in a sale of the business and assets. Approximately £3m of rent remained outstanding in respect of the stores that had remained open and then sold.
Two previous cases had held that where rent was payable in advance, it could not be apportioned so that rent incurred before the administration would be an unsecured claim in the administration and that rent incurred after became an expense of the administration (Goldacre (Offices) Limited –v- Nortel Networks UK Limited  EWHC 3389 (Ch) and Leisure (Norwich) II Limited –v- Luminar Lava Ignite Limited  EWHC 951 (Ch)). It then became common practice to appoint administrators immediately after a quarter day to avoid the rent for that quarter becoming an expense of the administration, which was exactly what happened in the Game case. Understandably landlords have become increasingly frustrated that companies in administration have been able to use their premises rent free for that first quarter.
Against this background, the landlords in the Game situation challenged the position.
After considering the case law at length, the Court of Appeal held that an officeholder (whether an administrator or liquidator) must make payment of rent at the full rate for the duration of the period during which possession of the premises is retained for the benefit of the administration. Whether or not the rent is due in advance or in arrears, it will be apportioned on a day to day basis and the payment from the officeholders will be payable as an expense of the administration.
It is important to note that rent accruing after the date of appointment of the administrators does not automatically become an expense of the administration. In order for it to do so, the officeholder must retain or use the premises for the benefit of the administration. Simply failing to surrender the lease whilst the administrator decides what to do will not be sufficient.
In view of this development, it is now less likely that a landlord will get leave of the court to bring forfeiture proceedings purely on the basis that the company has gone into administration.
Landlords who are notified of the administration or winding up of their tenant should get in touch with the Insolvency Practitioner as soon as possible to ask them to confirm their intentions with regards to the property and to notify them of daily rent that would be payable if the rent becomes an expense of the administration. This will enable Insolvency Practitioners to make an early decision to the assistance of all involved.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.