150005892From Chadbourne’s London office —

The recent decision by the Court of Appeal in Game Group (Pillar Denton Limited and Ors v Jervis & Ors) has delighted landlords and insolvency practioners alike by closing a controversial legal loop hole. Prior to the decision, the law had been left in “a very unsatisfactory state” with respect to the treatment of claims for rent payments, depending on when the administration was commenced.

Relevant Background Decisions

In most commercial real estate leases, the rent is paid quarterly in advance on a “quarter day,” i.e. 25 December, 25 March, 24 June and 29 September of each year.

In Goldacre, the Court ruled that if a quarter’s rent payable in advance fell due during a period in which the administrators were retaining the property for the purpose of the administration then the entire quarter’s rent was payable as an administration expense even where administrators gave up occupation later in the same period. Thus if a company went into administration on 24 December, the administrators would have to pay rent for the period 25 December to 24 March even if they gave up occupation of the property on 1st January. The rent would be an administration expense and therefore payable ahead of secured and unsecured creditors meaning that landlords got super priority.

In Luminar, the Court ruled that where a quarter’s rent payable in advance fell due before entry into administration, none of it was payable as an administration expense. This was the case even if the administrators retained possession for the purposes of the administration for the whole of that period. Thus if a company went into administration on 26 December, the administrators would not have to pay any rent for the period 25 December to 24 March even if they continued to occupy the property until 24 March. The rent would simply be considered as a debt in the administration and the landlord would rank as an unsecured creditor, even if the property was being used by the administrators.

As a result, conveniently, there would be a stampede of administrations on days falling immediately after a quarter day. This position was then exacerbated by the swift sale of the business to a new company which, in effect, traded for the first three months rent free.

The Game Group Decision

The Game group went into administration on 26 March 2012, the day after the March quarter day. Members of the group owned leasehold interests in a large number of stores and approximately £10 million (about $16,700,000) of rent became due on 25 March 2012. Some stores were closed immediately, but trading continued in other stores which were included in a sale of the business and assets of the group to Game Retail Ltd (which was not part of the group). Approximately £3 million (about $5 million) of the March rent remained outstanding in respect of those stores.  Who had to pay?

Lord Justice Lewison overruled both the Goldacre and Luminar cases and held that the equitable salvage principle applies as “it may not be a maxim of equity, but…you can’t have the penny and the bun”. Where the administrator uses or retains the property for the benefit of the administration, rent payable in advance will be payable as an expense of the administration for the duration of the period of “beneficial retention”. The rent will be treated as accruing from day to day and the duration of that period will be a question of fact. Thus the Game Group must pay the outstanding pro-rated sum of £3 million (about $5 million) in respect of the March rent.

Lord Justice Lewison granted permission to appeal. Time will tell if any of the parties decide to challenge this ruling in the UK Supreme Court.

If you have any questions, please contact Frances Jenkins or Craig Barrett in Chadbourne’s London office.