A landlord facing non-payment of rent from a tenant has a number of options. The landlord can: seek to forfeit the lease; agree with the tenant a surrender for a premium; undertake commercial rent arrears recovery; or sue the tenant for the debt owing. Once the tenant enters into an insolvency process the landlord’s rights may however be modified.

The landlord’s rights to commence proceedings are unaffected by voluntary liquidation. However, the liquidator may apply to restrain any proceedings being commenced against a company in liquidation. However, if the tenant company is in liquidation there is unlikely to be any necessity for the company to retain its leasehold premises.

The company would generally have ceased trading and its assets will be realised. In practical terms, there might be an agreement between the liquidator and the landlord to hand over to the liquidator goods belonging to the company which are held at the premises and/or arrange for the orderly clearance of the premises. The head lease will then be dealt with by forfeiture or surrender.

In the case of compulsory liquidation, leave of the court is required by the landlord to take any action or proceedings (section 130(2) of the Insolvency Act 1986). It has however been held that peaceable re-entry of the premises by the landlord is not an action or legal proceeding within the purposes of section 130(2) (see Ezekiel v Orakpo [1977] 2 QB 260). In practice, where the tenant company is in compulsory liquidation this is the most likely course to be taken.

Administration has one considerable advantage over voluntary liquidation, and indeed receivership, in that it prevents the landlord who may be owed arrears of rent from exercising rights of action without leave of the court or consent of the administrator. On application by a landlord the court will balance the interests of the landlord against the interests of the creditors as a whole, taking into account all circumstances of the case (see Re Atlantic Computers Systems Plc (No.1) [1992] 2 WLR 367 and Innovate Logistics Ltd v Sunberry Properties [2008] EWCA Civ 1321).

Where the administrator (as agent for the company) is in occupation of premises, he is liable to the landlord for payment of the rent and rates, as a cost and expense of the administration (see Re Trident Fashions Plc [2007] EWHC 400). Where the administrator has quit the premises (and in particular where the landlord has not agreed to forfeit or accept a surrender of the lease) the position has been less certain.

Clarity in this area has been provided by the recent case of Jervis and others v Pillar Denton Ltd (Game Station) and others [2014] EWCA Civ 180. This case overruled the earlier landmark cases of Goldacre (Offices) Ltd v Nortel Networks UK Ltd (in administration) [2009] EWHC 3389(Ch) and Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd (in administration) [2012] EWHC 951 (Ch).

In Goldacre it was held that the court should adapt the long-established Lundy Granite ‘salvage principle’. This is the principle that in liquidation one should assess whether a liability is an expense of the liquidation, by virtue of whether the assets/contract under which the liability arises is adopted for the beneficial conduct of the liquidation.  

Where Goldacre caused some difficultly (and potentially a departure from generally accepted working practice) was the further determination by Judge Purle QC that, in the circumstances, the lease was being retained for the beneficial conduct of the administration at a time when the rent fell due to be paid in advance, then the administrator was liable to pay the rent for the subsequent full rental period, whether or not the administrator remained in occupation for the entirety of that period; the rental liability could not be apportioned.   

In Luminar, Judge Pelling QC provided a logical conclusion of the Goldacre decision, by holding that where rent was payable in advance and fell due before the commencement of the administration it would not be payable as a cost and expense of the administration; where rent remained due at the commencement of the administration it was solely a debt which could be proved in the administration.

Game Stores Group Ltd traded from various leasehold premises. Like a number of administrations following Luminar, Game went into administration the day after the quarterly rent became due. The rent was not paid by Game and, shortly after, the administrators sold the business and some of the assets to a new buyer. The new buyer benefited from the fact that rent due would fall as a debt in the administration and that they would have almost an entire quarter rent free.

The administrators applied to the High Court for directions in relation to the payment of outstanding rent. The High Court judge followed Goldacre and Luminar and held that because the rent fell due the day before the administration, it was not payable as expenses of administration. Only rent/service charge payable after the date of administration would be treated as the expense of the administration.

The landlords appealed to the Court of Appeal. In a learned and lengthy judgment which looked closely at the development of the Lundy Granite principle, Lord Justice Lewison disagreed with the reasoning in Goldacre and Luminar, stating that the cases left the law in ‘very unsatisfactory state’. He stressed in particular that the salvage principle was founded in equity and not on the common law, a point he felt was overlooked by both the decisions of Goldacre and Luminar.

Lewison LJ said: ‘I cannot see why common sense of ordinary justice should be defeated by the happenstance that a rent day occurred immediately before the date of administration if the rent falling due on that day covered a period during which  the administrator retained possession of the property for the benefit of the administration.’

The corollary being that the landlord would not have to be paid for the full period, if the administrator vacated the premises during the rental period allowing the landlord to re-let.

Lewison LJ said: ‘The office holder must make payments at the rate of the rent for the duration of any period which he retains possession of the demised property for the benefit of the winding up or administration. The rent will be treated as accruing from day to day… the duration of the period is the question of fact and is not determined merely by reference to which rent days occur before, during or after that period’.

The judgment thus makes it clear that the rent can be apportioned in cases of insolvency and that the administrator will be liable to pay for the period in which the leasehold property is retained for the benefit of the administrator. It thus returns the law to the state pre-Goldacre, where an administrator would seek to agree to ‘pay as you go’ with the landlord.  

Game Station has however left a number of unanswered questions. What form of use is to be regarded as benefiting the administration? For example, storage for a short period? Whether use of only part of the premises means that the rental liability as an expense is proportionately reduced? What will be the retrospective effect on cases that have been administered in accordance with Goldacre and Luminar? It is hoped that clarification can come quickly on these issues.

The case concerned the administration process, but the court made it clear the same principles would apply in liquidation.

Vernon Dennis is head of corporate restructuring at HowardKennedyFsi