The issue to consider in this appeal was how rent payable under a lease held by a corporate tenant who enters administration should be treated. The questions being: when is rent no more than a provable debt; and when does rent rank as an expense of the administration?
Following a detailed consideration of the basis and application of the “salvage principle” Lord Justice Lewison, giving the leading judgment, opined that just because rent payable in advance is not apportionable under the Apportionment Act 1870 does not automatically mean that the “salvage principle” does not apply. In its analysis of the principle, the Court of Appeal found that the “salvage principle” was founded on equitable grounds and not on the common law or statute.
As such, the Court of Appeal overruled the decisions in Goldacre and Luminar and held that the administrator or liquidator (as the case may be) 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 (as the case may be).
Further, rent is payable as an expense of the winding up or the administration (as applicable) for the period during which the property is used, and the rent is treated as accruing from day to day. The duration of the period is a question of fact and is not determined merely by reference to which rent days occur before, during or after that period.
Rosling King Partner James Walton said:
“Without doubt the previous decisions in Goldacre and Luminar influenced how and, more importantly, when a company would be put into administration.
As noted by the Court of Appeal in its consideration of the appeal, a consequence of the previous case law was that it had become more common for companies to enter into administration following a quarter day thereby avoiding liability to pay the full rent even if the administrators subsequently retained possession of the leasehold property. Clearly, and as enunciated by Lewison LJ, the results of Goldacre and Luminar had ‘…left the law in a very unsatisfactory state’.
The Court of Appeal’s decision can, at the least, be welcomed due to the clarity and certainty it provides in relation to the treatment of rent as an expense of an administration (or, indeed, a liquidation).
That said, the decision will of course have a significant impact on the conduct of administrations where a company has interests in leasehold property and it remains to be seen whether the decision will be appealed. Further, although the decision gives clarity to when rent should be paid as an expense of the administration or liquidation, there will likely be further argument in other cases arising out of when exactly an administrator or liquidator (as the case may be) ‘…retains possession of the demised property for the benefit of the winding up or administration.’”
