Landlords trump Administrators in Court of Appeal decision

In what has been described as a ground-breaking decision this week, the Court of Appeal has ruled on how and when rent is to be paid to commercial landlords following the Administration of a tenant.

In Jervis and Others v Pillar Denton Ltd and others [2014] EWCA Civ 180, the Court of Appeal have overruled the earlier and arguably controversial High Court decisions in Goldacre (Offices) Limited v Nortel Networks UK Limited [2009] EWHC 3389 (Ch) and Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd [2013] 3 WLR 1132. Those earlier decisions established that, upon entering into Administration, Administrators who were in occupation of the demised premises for the benefit of the Administration of the tenant’s estate, were liable to pay a full quarter’s rent as an expense of the Administration, but provided that the rent payment day (usually a quarter day) fell within the period of Administration (at least where rent is payable in advance).

This led to the well adopted tactic by tenants of entering into Administration the day after the quarter’s rent fell due, thereby allowing the Administrators to escape from having to pay that quarter’s rent as an expense of the Administration. The rent would still be provable as a debt in any subsequent liquidation of the tenant, but, unlike an expense in the Administration, would not rank with any priority over other creditors. That benefit for Administrators was tempered by the result that, unless occupation ceased before the next quarter rent day, the full unapportioned rent would be payable as an expense of the Administration, irrespective of whether occupation ceased before that rent payment day.

The earlier High Court decisions were fuelled by the position under the Apportionment Act 1870, which establishes that rent payable in advance is not apportionable. The Court of Appeal concluded that this did not fetter the principles of equity, and particularly what is described as the “salvage principle” which applies to the interpretation of rule 2.67 of the Insolvency Rules 1986 (which deals with the priority of payment of expenses incurred in an Administration).

In his leading judgment, Lewison LJ had no time for the unfairness and irrationality that he identified arose from the previous High Court rulings.

In the case of an Administration, rent is to be apportioned on a day to day basis throughout the time Administrators are in occupation of demised premises and payable accordingly as an expense of the Administration.

This new position will be welcomed by commercial landlords, long fed up with being short-changed by the timing tactics of their insolvent tenants and Administrators. Administrators may now have to re-think their strategy as to when an insolvent tenant should be placed into Administration. There is no longer any advantage in waiting until the day after a rent payment day, and no advantage in trying to avoid the following rent payment day. Further, faced now with potentially unavoidable claims for rent by landlords, Administrators may feel compelled to terminate the Administration as quickly as possible, and head for liquidation, rather than spending time finding a viable buyer for the troubled tenant’s business.

The question that this begs is whether this will ultimately benefit the landlord. Where the Court of Appeal ruling leaves cases founded on the earlier, but now overruled, High Court decisions remains questionable.

Peter Byfield is the partner responsible for the property dispute resolution team at Wannops LLP. For further enquiries please contact him on 01243 778844.

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