21 Mar 2014

Rent Payments by Companies in Administration - a whole new Game?

Rent Payments by Companies in Administration - a whole new Game?

Jane Gordon, Senior Solicitor, provides a summary of a recent landmark Court of Appeal decision that will have an effect on the way company Administrations are handled.

Jane Gordon, Senior Solicitor, provides a summary of a recent landmark Court of Appeal decision that will have an effect on the way company Administrations are handled.

There has been a recent landmark decision at the Court of Appeal regarding the way that rent is to be treated by companies in administration.

In the recent case Jervis -v- Pillar Denton Ltd and Others (2013), the Game group of companies went into administration. The company had multiple rented shop premises across the country and the main question here was how to treat the rent that was due under each lease at the time the company went into administration.

In this case, a claim was brought for £3m in unpaid rents following the company’s entry into administration.

Existing Law

Prior to this decision, it was established law that administrators could trade a business in administration from rented premises for as long a period as 3 months and be protected from any claim or enforcement action taken by a landlord.

It was often seen that companies would enter into administration the day immediately after a quarter day when rent was due in advance (e.g. rent due for the period 1st January 2014 – 1st April 2014 would be payable on 31st December 2013, and the company would enter administration on 1st January 2014). The existing law meant that the company would then avoid liability for the rent for that full quarter (1st January – 1st April 2014) even if the premises continued to be used for the benefit of the administration.

If a company entered into administration before a quarter day when rent was due, then they would still be liable to pay the full quarter rent due as an administration expense.

The Decision

The Court of Appeal has now overruled this position and the previous case law supporting it. The Court of Appeal has held that an administrator must now pay rent as an administration expense for each day that he retains possession of the premises leased and used for the benefit of the administration, as per Lord Justice Lewson:

  • “The extent of the principle is that the office holder must make payments at the rate of the rent for the duration of any period during which he retains possession of the demised property for the benefit of the winding up or administration (as the case may be).
  • The rent will be treated as accruing from day to day. Those payments are payable as expenses of the winding up or administration.
  • The duration of the period is a question of fact and is not determined merely by reference to which rent days occur before, during or after that period.”

This meant that Game were due to make payment of the £3m due in unpaid rent, having entered into administration just before the quarter day in March 2012. An Appeal to the Supreme Court has, however, not been ruled out by Game.

Effects of the Decision

With the removal of the ‘rent free’ period, and consequent ‘tactical’ administrations, the decision will no doubt have some effects on current administrations which began before the date of the decision. It may be that we see landlords now trying to recover rent as an expense of administration at the daily rate that premises were used for the benefit of the administration.

There may also require to be some clarification on what the definition of ‘retention or use of the premises for the purpose of the administration’ will be. It may be that premises are still being used for storage, even though they are not actively trading, and it is unclear whether rent will be allowed to be charged for such premises.

It also means that the amount of funds available to unsecured creditors will be reduced given that landlords will be able to recover their rents preferentially.

However, the decision has been widely praised for providing clarity for administrators and allowing for better planning and maximising of the value of businesses for the benefit of creditors.

Jane Gordon, Senior Solicitor


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