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The Court of Appeal has today handed down its eagerly awaited judgment in the matter of Pillar Denton Ltd & Ors v Jervis & ors  (A2/2013/2005) ("Game").
The Administration of the retail computer company, Game Group, has created a substantial amount of litigation (not least the earlier case of Lazari v Game Retail (UK ) Limited  on applications by landlords for leave to forfeit in administration cases).
On the 1 July 2013 the High Court (Chancery Division) heard an application by administrators for directions and, when doing so, gave the respondent landlords permission to appeal to the Court of Appeal on the issue of the extent to which rent and service charges falling due both before and after the appointment of administrators were to be treated as expenses of the administration.
This was the question raised in the case of Goldacre (Offices) Ltd v Nortel Networks UK Ltd (In Administration)  Ch. 455 ("Goldacre"), where the Court (feeling constrained by the House of Lords' ruling in Toshoku Finance UK Plc (In Liquidation), Re  UKHL 6,  1 W.L.R. 671) ("Toshoku") held that where administrators were using the company's leasehold premises for the purposes of the administration, they were obliged to treat rents and other sums that fell due during that period as an expense of the administration, in full and without any apportionment to reflect the administrators' actual period of use.
The administrators of Nortel had tried to pay only the rents for the part of the property the company still actually used. However the full extent of the property actually leased was very large and the court held that if the administrators were making use of any part of the property then the tenant administrator should pay rent for the whole (as an “expense” of the administration). Goldacre applied an 'adoption of contract' approach to rent as per Powdrill v Watson .
This principle was then followed extended by the case Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd (In Administration)  ("Luminar") which related to whether rent was payable as an expense for a period that fell due before Luminar entered administration.
In the latest case the applicant administrators of the Game group applied to the court for directions, relating to the priority of the payment of rents and service charges (together with other charges falling due under the lease during the period of the administration).
The Game Group was a high street retailer and through subsidiaries was the tenant of a number of stores. The rent was payable in advance on the usual quarter days. The administrators had been appointed the day after the quarterly rent fell due under a number of leases. The landlords under a number of sample leases were the respondents to that application.
Following Goldacre and Luminar Lava the position appeared to be that:
In Game at first instance, the Game landlords were challenging the proposition that the rent and service charges that fell due the day before administrators' appointment was not an administration expense. The landlords argued that this created a highly unfair set of circumstances as an administrator can delay an administration to take effect for a day (or any short period) so that the administration commences just after a quarter day (or after any day when the rent falls due).
On the basis of Luminar the administrator can thereby obtain use of a property without incurring any liability to pay the rent as an expense (the rent would be left as an unsecured debt without priority).
In the Game decision at first instance, it was held that the decisions in Goldacre and Luminar would be followed and it made directions to the effect that the quarterly rent and service charge which fell due immediately before the administration were not administration expenses, and that rent and service charge falling due following the administrators' appointment would be payable in full as an expense even if they thereafter ceased to use the premises.
However, at the same time, Nicholas Lavender QC, gave leave to appeal so that the Court of Appeal could rule on the issues - on the basis that the matter was of concern to administrators and landlords generally and the amounts involved in the instant case were significant.
The case was finely balanced, particularly given the Supreme Court's ruling in the case of Re Nortel GmbH & Others  UKSC 52 ("Nortel Pension Case"), where the Supreme Court was of the view that the House of Lords' decision in Toshoku should properly be limited to liabilities imposed by statute where Parliament had intended that liability to rank as an expense and should not have wider application to liabilities arising under contracts between 2 commercial parties.
In its judgment today the Court of Appeal (LJ Lewison handing down the only reasoned judgment) allowed the appeal and overruled the Goldacre and Luminar decisions.
The important points to note from the Court of Appeal's decision in Game are as follows:
This article was written by Roger Elford.
For more information please contact Roger on +44 (0)1483 252 531 or firstname.lastname@example.org