Victory for landlords as Court of Appeal hands down decision in the Game Station case

The Game Station case¹ is the latest in a string of decisions following the landmark rulings in Goldacre and Luminar. It considers whether rent due under a lease between the landlord and a company in administration should be deducted as an expense of the administration.

Background

Historically the treatment of rent in administrations was determined by considering the interests of the landlord against the interests of the creditors of the insolvent company.² This was certainly the case until Goldacre.³ Goldacre was the landlord of Nortel Networks UK Limited, a company that went into administration.

It was decided in Goldacre that rent falling due before the appointment of an administrator is to be regarded as an unsecured debt, with the implication that the landlord will rank among the unsecured creditors. So if rent falls due for payment before the company in administration begins to use the premises for the benefit of its creditors, it will not rank as an expense of the administration. Landlords felt aggrieved by this decision as Goldacre had effectively left them exposed. The inevitable outcome of this was to encourage administrators to rush appointments in order to avoid rent payments and for company directors to delay administration in order to side-step a payment due to the landlord – hence increasing the trading life of the company, with the risk that it will not be able to pay the additional debts it incurs during that prolonged period.

This approach was also adopted by the court in Luminar,⁴ which involved the administration of one of Britain’s largest nightclub operators. Luminar went into administration after the September quarter date without paying quarterly in advance. After going into administration, Luminar continued to occupy and trade from the leasehold premises while the administrators marketed its business and assets for sale. It was decided in Luminar that, where rent falls due before the commencement of the administration, the existing arrears are not payable as an expense of the administration; instead the landlord can prove that unpaid rent as an unsecured creditor.

Not surprisingly, following those decisions it had become increasingly common for companies to enter administration after the rent quarter day. Understandably landlords felt aggrieved by this process, as it would clearly be advantageous for administrators to be appointed a day after the last rent payment date.

Facts

That is what happened in the Game Station case. Once again, the court had to consider whether rent and service charges payable in advance that fell due before the administration constituted an expense of the administration. The case concerned the collapse of the video games chain, Game. In the Game administration, administrators were appointed on the day after the March quarter day on which rent became due. This meant that the administrators would avoid having to pay several millions of pounds in rent before selling the business to a new owner.

Judgment

At first instance the judge was obliged to follow the decisions in Goldacre and Luminar, but granted permission to appeal. A consortium of landlords took the case to the Court of Appeal, in which they argued that landlords should be paid rent for the period during which the property is being used during the administration. In his judgment Lord Justice Lewison commented that: “The result of Goldacre and Luminar has left the law in a very unsatisfactory state.”

Implications

The Court of Appeal has overruled the decisions reached in Goldacre and Luminar, and this has changed the way in which rent is considered as part of an administration. Rent should now be paid for the period of occupation; it will be treated as accruing from day to day and will form part of the administration expenses.

While Goldacre initially changed the landscape in favour of the company in administration, it appears that Game Station has tipped the balance decidedly in favour of landlords. Perhaps the position before Goldacre was the most satisfactory for the company in administration, but Game Station has provided a sound judgment on what was an extremely unsatisfactory position.

Gurpreet Sanghera, Associate, Michael Simkins LLP

1. Pillar Denton Ltd v Jervis [2014] EWCA Civ 180, on appeal from the decision in Re Game Station Ltd (Jervis v Pillar Denton Ltd) [2013] EWHC 2171 (Ch).
2. AIB Capital Markets plc v Atlantic Computers Systems plc [1992] (Ch) 505. The Court of Appeal made it clear in this case that a balancing exercise should be conducted by the courts.
3. Goldacre (Offices) Limited v Nortel Networks UK Limited (in administration) [2009] EWHC 3389 (Ch), Case No. 536 of 2009.
4. Leisure Norwich (II) Ltd v Luminar Lava Ignite Ltd (in administration) [2012] EWHC 951 (Ch).