Vol 11 (2014) - Issue 4

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Game v Springfield: Comparing the Treatment of Rent as an Administration Expense in Scotland and England

As readers of this Journal will already be well aware, despite the fact that the corporate insolvency law of the constituent nations of Great Britain derives from a single act of Parliament, there can often be a divergence in the approach taken north and south of the Scotland/ England border. This extends to a variety of issues arising in relation to corporate insolvency. This divergence arises as a consequence of both the applicable common law, and the separate secondary legislation in place in the jurisdictions which provides the detailed framework within which insolvency practitioners and their advisers need to operate. A recent example in the context of disclaimer of onerous property was featured in this Journal.
This article examines the implications for insolvency practitioners dealing with leases of Scottish property of the recent Court of Appeal decision in the Game case. The decision has had the effect in England of overturning the decisions of the single judges in Goldacre and Luminar regarding the liability of administrators or liquidators to pay rent as an expense of the insolvency proceeding. The effect of the Game decision is that, where the administrators continue to use the rented property for the benefit of the administration, rent will be treated as if it were a debt incurred by the insolvency practitioner and therefore as an expense of the insolvency process. It will accrue on a daily basis for the period of use of the property, irrespective of the date on which rent fell to be paid. Although the Game case dealt with expenses in the context of an administration, the decision, and the issues examined in this article, are equally relevant in the context of a liquidation.

The position in England before Game
Following the decisions in Goldacre and Luminar, the Courts had taken an all or nothing approach: administrators were not liable to pay rent that fell due before the date of their appointment as an expense of the administration, even if they continued to use the property after appointment for the benefit of the administration. This meant that a carefully timed administration appointment would have the effect of giving the administrators a cost free period of use of the property until the next rental payment fell due. The administrators also had no obligation to settle the rent arrears incurred prior to the commencement of the administration. Those arrears were simply a provable debt, with the landlord having the right to submit a claim in the administration for the unpaid debt, and being entitled to receive a dividend from the administrator once the assets of the company had been realised. This position was unsatisfactory for landlords. In reality, unless the landlord held any security or guarantee for his rent, he would in all probability only receive a small proportion of the rental arrears by way of dividend.

The Landlords’ hypothec: a common law security for Scottish landlords
The effect of a Scottish common law right led, however, to a potentially quite different outcome for landlords of Scottish properties. Scots law recognises a common law right of security called the landlords’ hypothec. Landlords’ hypothec is a security which arises by operation of law and secures to the landlord the tenant’s assets that are physically located on the rented property at the time at which the tenant enters into an insolvency procedure. Those assets are security for any unpaid rent which was due to the landlord at the time the tenant entered into the insolvency procedure.