Vol 11 (2014) - Issue 2

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‘Pay as You Go – You Can’t Have the Penny and the Bun’: Court of Appeal Overrules Goldacre and Luminar on the Treatment of Rent as an Expense

On 24 February 2014, the Court of Appeal handed down its decision in the Game case. In an important ruling for insolvency practitioners and landlords, the Court unanimously held that where an administrator or liquidator makes use of leasehold property for the purpose of the administration or liquidation, rent must be treated as accruing from day to day during that period and payable as an expense.
In reaching its decision, the Court of Appeal analysed the scope and application of the so-called 'salvage' or 'Lundy Granite' principle whilst at the same time concluding that the Goldacre and Luminar decisions had left the law in a very 'unsatisfactory state'.

Background
In Goldacre and Luminar, the High Court had to decide in what circumstances rent payable in advance under leases held by companies that had gone into administration should be treated as an expense of the administration or, in the alternative, as a provable debt.
In Goldacre, the Court held that if quarterly rent payable in advance fell due during a period in which administrators retained the property for the benefit of the administration, the whole of that quarterly rent payment was due irrespective of whether the administrators vacated the property prior to the end of the relevant quarter.
Whilst the decision in Goldacre was initially (and unsurprisingly) considered to be favourable to landlords, the subsequent confirmatory ruling in Luminar was not. The decision in Luminar reflected the corollary of the position reached in Goldacre; namely that if quarterly rent fell due before a company entered administration, the rent for the whole quarter would be a provable debt, not an expense, even in circumstances where the administrators retained the property for the benefit of the administration during part or all of that quarterly period.
One consequence of the decisions in Goldacre and Luminar is that it has become common for companies to enter administration on the day immediately following a rent quarter day, thus enabling administrators to retain the possession and use of a property for a significant rent free period. In view of the seemingly deliberate timing of appointments around rent days to avoid payments, landlords have called for a return to the 'pay as you go' regime previously adopted.
The facts in Game demonstrate just one example of such 'timed' administration appointments with the Game group entering administration on the day after a rent quarter day. At first instance, the judge (Mr Nicholas Lavender QC) simply followed the decisions in Goldacre and Luminar without sustained argument, and granted permission for the landlords to appeal.

The Court of Appeal ruling
In overruling both Goldacre and Luminar, Lewison LJ reasoned that the ‘sensible result’ was available to the Court notwithstanding the 'substantial body of case law':
'It is common ground that if the landlords succeed in establishing that part of an instalment of rent payable in advance is capable of being treated as an administration expense, then the principle must work in both directions. In other words, if rent payable in advance falls due during the period when the administrators retain possession, it too must be apportioned if they subsequently go out of possession during the quarter. That is the subject of a contingent cross-appeal. This would, I think, be the sensible result'.