Landlords Secure Legal Victory over Games Station Ltd's Administrator

Commercial landlords will have been following the case of Games Station Ltd, which reached the Court of Appeal recently (February 2014), but it is of interest to all who supply goods and/or services to companies that then go into administration.

The Facts

Games Station Ltd, a recognisable presence on many high streets, was the tenant of hundreds of retail properties.  The rent due for the majority of the retailer’s shops was payable quarterly in advance.  On 25 March 2012, rent of £10 million fell due.  Games Station Ltd was experiencing financial difficulty and went into administration the following day.  The administrators retained the properties for the benefit of the administration.

Is the £10 million rent bill an expense of the administration, payable by the administrator if he stays in occupation, or does it fall to the landlord to pursue the unpaid rent as a creditor in the administration leaving the landlord unable to obtain possession or distrain for rent against the administrator during the quarter?

The Court’s Approach: ‘The Salvage Principle’

Where property is leased by a company in administration and is retained by the administrator for the benefit of the administration, under the salvage principle an administrator must pay rent during the period for which he uses the property.  The rent is treated as accruing from day to day and is payable as an expense of the administration.

In this case the trial Judge, relying on earlier case law, found that quarterly rent falling due in a period when administrators were using the property for the purposes of the administration amounted to an administration expense.  Rent falling due before administration was simply a debt in the administration.  It follows that as the quarterly rent fell due before Games Station Ltd entered administration it was not due to be paid by the administrator as an administration expense and the administrator would be treated as though the rent had been paid.

In Practice

The case law in this area left landlords vulnerable.  Where rent is paid quarterly in advance, it was beneficial for a company to delay the appointment of an administrator until immediately after the rent due date.  The administrator could then take the benefit of retaining the property without incurring rent for a period of three months as an administration expense.  The landlord would be left to pursue the rent for that period (with no certainty of recovery) as a simple debt along with other creditors in the insolvency. If it recovered anything it would most probably only be a percentage of the sum due.

Court of Appeal

The Landlords in this case successfully appealed against the decision.

In a ruling that will be welcomed by commercial landlords, and some other suppliers, the Court of Appeal could not see why common sense or ordinary justice should be defeated in the circumstances where a rent due date occurs prior to the appointment of an administrator but the rent payable covers a period of time during which the property will be retained for the benefit of the administration.

In an administration, the administrator must make payments (applying the Salvage Principle) at the rate of the rent for the duration of any period during which he retained possession of the property for the benefit of the administration.  Crucially, the Court found that the duration of the period is a question of fact and not determined merely by reference to which rent days occurred before, during or after administration.

Businesses in administration will now have to pay rent on a ‘pay as you use’ basis, with rent accruing as an administration expense on a daily basis.

Games Station Ltd has confirmed it is considering an appeal to the Supreme Court.

Geoffrey Sturgess, Consultant Solicitor for Warner Goodman Commercial, made the following comments:

This decision of the Court of Appeal follows a general trend that is moving English insolvency practice in the direction of that in the US where suppliers to the insolvent business (in protection from creditors) can be forced to continue supplying that which they contracted to supply before the insolvency, whether they have been paid for those earlier supplies or not, but provided they are paid for goods or services supplied after the administration commences.

The Insolvency Act did not provide for this and the trend comes from decisions of the courts trying to give effect to the intention of the legislation which was to allow businesses to survive insolvency and save jobs. One must now question the continuing utility of the ubiquitous clause in commercial contracts allowing the supplier to terminate for the buyer’s insolvency thus allowing suppliers to only continue to supply if their pre-administration debt is paid in preference to other creditors.

If you are looking for advice on commercial property contracts, you can contact the team on 02380 717717, or find their section of the website here.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.