STOP PRESS: Rent as an administration expense: Court of Appeal decision in Game Group

24/02/14

The Court of Appeal's judgment in Game Group (sub nom  rs [2014] EWCA Civ 180)  was handed down on 24 February 2014. In a key decision, delivered by Lewison LJ, the CA has unanimously overturned the earlier rulings in Goldacre (Offices) Ltd v Nortel Networks UK Ltd and Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd and has held that, where the equitable salvage, or Lundy Granite, principle applies and where the office-holder uses or retains property for the benefit of the winding up or administration, rent payable in advance will (like rent payable in arrears) be payable as an expense of the administration or winding up for the duration of the period of "beneficial retention". Such rent will be treated as accruing from day to day. The duration of the period will be a question of fact and is not determined merely by reference to whether a  rent day occurs before, during or after that period. For rent falling due in advance after the commencement of the administration or liquidation, this will require a "wait and see" approach to determine what will be payable for the actual period of beneficial retention, restoring the Atlantic Computer Systems (No. 2) approach to measuring administration expenses.

The result of Goldacre and Luminar had left the law in "a very unsatisfactory state"[100].  The Court of Appeal has overruled them on the following grounds:

1. In Goldacre, the judge had erred in holding that because rent payable in advance is not apportionable under the Apportionment Act 1870, the salvage principle was ousted and meant that rent falling due after the administration was payable in full and would not fall to be apportioned should the administrators vacate the premises during the relevant contractual rent period. In addition, the judge had been wrong to rely on the "adoption" principle as explained by the House of Lords in Powdrill v Watson [1995] 2 AC 394. In the CA's view, the "adoption principle" does not apply to periodical payments such as rent.
2. In Luminar, the judge had been wrong to decide that Lord Hoffman's analysis of the salvage principle in Re Toshoku Finance Ltd [2002] UKHL 6 did not support the proposition that the "beneficial retention" principle extends to debts that have already become due at the date of commencement of the liquidation or administration.  It was plain that for Lord Hoffman the right to prove for a pre-liquidation debt and the salvage principle, which is founded in equity and not common law, were not mutually exclusive, and debts accruing both before and after liquidation (including rent payable in advance on a day preceding the administration or liquidation) are thus capable of falling within the salvage principle.

It remains to be seen if there will be an appeal to the Supreme Court.  A full technical bulletin will follow.