Liability of administrators for using property – a fair outcome

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

Introduction

The Court of Appeal in Pillar Denton v Jervis ("Game") [24 February 2014] has addressed the highly topical and significant issue of the liability of administrators of a corporate tenant for rent as an administration expense when retaining possession of premises for the purposes of the administration.

"Unfairness" of Goldacre and Luminar position

The previous decisions ofGoldacreandLuminarresulted in unfair outcomes in that administrators could end up paying an entire quarter's rent in advance as an administration expense, even though they were not in possession of the premises for most of that period. Conversely and perhaps more frequently, they could end up being in possession for almost an entire quarter without having to pay rent as an expense for that period. The rent would simply be provable as a debt in the administration, reducing the chances of recovery. Those somewhat inequitable outcomes were determined by whether the date of the entry into administration occurred before, on or after the relevant rent payment date. If it was before or on the rent date, the administrator was liable for the whole quarter's rent as an expense; if it was after the rent date, he was not liable for rent as an expense for the remainder of the quarter. The problems arose where rent was payable in advance, especially quarterly in advance.

There has been a great deal of concern among landlords that some insolvency practitioners were structuring the entry into the administration around the particular quarter day to ensure almost a quarter's occupation free of rent as an expense. Landlords were particularly unhappy where there was a fast sale of the business to a new company that in effect traded for the first three months' rent free. Some insolvency practitioners also felt hard done by in having to pay rent as an expense for periods when they were not in possession.

Court of Appeal decision in Game

The Court of Appeal inGamehas dealt with those concerns in a decision that emphasises fairness. The Court overruled theGoldacreandLuminardecisions. Lord Justice Lewison, providing the judgment of the Court, stated that the administrator must pay rent (at the rate reserved by the lease) for the duration of the period that he retains possession of the property for the benefit of the administration. The rent is treated as being paid on a daily basis and such payments are payable as expenses of the administration. The key point in the judgment is that the duration of the period for which rent must be paid as an expense is a question of fact and is not determined merely by reference to which rent payment dates occur before, during or after that period. The Court confirmed that a liquidation should be treated in that regard in the same way as an administration.

Concerns from Game decision

One concern expressed about theGamedecision emanates from possible difficulties for a landlord of empirically proving the duration of the period that an administrator or liquidator is retaining possession of the property for the benefit of the administration/liquidation. This may be obvious in many situations where the trading continues in the relevant property, but may be more challenging where it is unclear if the administrator or liquidator has retained possession for the benefit of the administration/liquidation. While the Goldacre/Luminar position could be unfair, it, at least, had the benefit of being more certain.

Another concern emanates from the fact that now the Court of Appeal has changed the law, the new law is treated as if it always was the law. This retrospective impact may provide opportunities for landlords or office holders to seek extra rent as an expense or refunds of rent already paid. However, since in most cases, the maximum amount at issue will be just under a quarter's rent, the potential costs of bringing a claim are likely to dissuade many would-be claimants, except where there is the possibility of claims against an administrator/liquidator/landlord for multiple properties.

Other implications

There are perhaps a few matters left unsaid by the Gamedecision. It did not specifically address the situation where an administrator retains possession of part only of a property and claims that he is only liable for rent as an expense (on a daily basis) for that part of the property. There is perhaps uncertainty over the legitimacy of such a claim. AlsoGame specifically focused on rent and did not address the treatment of service charge, dilapidations and other payments.

The property industry had been discussing possible changes to lease drafting to seek to mitigate the losses for landlords of an administrator being perceived to manipulate the position by entering into administration just after the quarter day. In the light of theGamedecision, such drafting changes now seem unnecessary.

While the Court of Appeal refused leave to appeal against its decision, Jervis and the other respondents may seek leave to appeal directly from the Supreme Court. This would not be a total surprise in view of the multi-million pound sums at stake.

Conclusions and action points

Property owners should seek specialist advice on the implications of theGamedecision for properties with a corporate tenant in administration or liquidation, or where there are fears that such an insolvency situation is imminent. Such advice should extend to the possibility of making or defending claims in respect of past rent. Advisers should emphasise the need for landlords to accumulate evidence to prove the fact that the administrator or liquidator is or was in possession for the purposes of the administration/liquidation and the duration of the period of possession.

Advisers to insolvency practitioners should be alert to the possibility of claims against property owners for refunds of rent previously paid by the insolvency practitioners, that followingGameshould not have been paid.

All in all, a fair outcome, but issues remain and the courts may not have had their final say.

Warren Gordon, Head of Real Estate Know How at Olswang LLP - 11 March 2014