Rent as an expense – has the Game only just begun?

by Neil Smyth, Taylor Wessing

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28 Feb 2014

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NEARLY TWENTY FIVE YEARS AGO, a High Court decision in Re Atlantic Computers laid down the principle that administrators and liquidators must pay rent for the period of occupation as an expense, paid ahead of creditors, rather than as an unsecured claim paid last and likely to recovery pence for every pound owed.

At the end of 2009, that all changed with the High Court decision in Goldacre, which ruled that if administrators are in occupation on a rental due date, they must pay rent for the full period (eg the quarter) as an expense, regardless of the period of occupation.

Initially, this decision was viewed positively by landlords. However, the response of insolvency practitioners was to view the Goldacre decision from the other end of the kaleidoscope and to maintain that if an administrator was not in occupation on a rental due date, then no rent was payable as an expense for that quarter, month or whatever the period might be. This approach was approved in 2012 in another High Court decision in Luminar.

That Luminar decision somewhat muddied the waters between insolvency practitioners and landlords, with the latter accusing administrators of deliberately taking office the day after a rental due date to take advantage of rent free occupation and administrators pointing to the legal position, as it stood, and their duty to act in the best interest of all creditors. Both sides hankered for a return to the good all days, but legal precedent had other ideas.

However, the good old days appear to have returned with the Court of Appeal decision in GAME handed down 24th February 2014. In light of the High Court decisions in Goldacre and Luminar, the issue was 'leap frogged' to the Court of Appeal, who have overturned Goldacre and Luminar and transported us back to the law as it stood in the days of Re Atlantic Computers - rent is paid as an expense of an administration.

However life, and the law, is never that simple. It is understood that the decision may be appealed to the Supreme Court. In the meantime, a number of questions remain for insolvency practitioners and landlords alike.

For insolvency practitioners, in respect of on-going administrations, where an administrator is currently not paying rent as an expense because he/she was appointed after a rental due date, should rent now be paid for the remaining period of occupation from 24 February 2014? The answer would appear to be yes, but, how will that affect the budget. Will the administrator have sufficient funds to pay the rent? In addition, in respect of on-going administrations, will landlords seek to recover rent not paid for during a period of occupation?

The recent GAME decision theoretically has retrospective effect. This has consequences not only for on-going administrations, but also for those that have concluded. Will landlords seek to re-open those administrations in respect of periods of occupation where rent has not been paid as an expense? Can they when administrators have been released, or will such claims constitute misfeasance and personal liability for administrators?

The logical conclusion is that the courts will not criticise administrators for acting in accordance with the law as it stood at the relevant time, but if the amounts justify it, former administrators may have to deal with such claims, even if they don't necessarily materialise as legal proceedings.

The law may therefore be back to where both landlords and insolvency practitioners want it to be, but for how long if the GAME decision is appealed and what will be the consequences in the meantime?

Neil Smyth, is a partner at international law firm Taylor Wessing

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