Jervis v Pillar Denton Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Lewison,Lady Justice Sharp,Lord Justice Patten |
| Judgment Date | 24 February 2014 |
| Neutral Citation | [2014] EWCA Civ 180 |
| Docket Number | Case No: A2/2013/2005 |
| Court | Court of Appeal (Civil Division) |
| Date | 24 February 2014 |
[2014] EWCA Civ 180
Lord Justice Patten
Lord Justice Lewison
and
Lady Justice Sharp
Case No: A2/2013/2005
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT,
CHANCERY DIVISION, COMPANIES DIVISION
Mr Nicholas Lavender QC (sitting as a Deputy Judge of the High Court)
20122443,2558,2559,2560
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Antony Zacaroli QC & Ms Hannah Thornley (instructed by Berwin Leighton Paisner LLP) for the Appellants
Mr Daniel Bayfield (instructed by Linklaters LLP) for the 1 st and 2 nd Respondents
Mr John McGhee QC & Ms Catherine Addy (instructed by Macfarlanes LLP) for the 3 rd Respondent
The issue
The issue on this appeal is the treatment of rent payable under a lease held by a corporate tenant that enters administration. When is the rent no more than a provable debt; and when does it rank as an expense of the administration?
Background
The question arises in the context of the administration of the Game group of companies. One of the companies in the group ("GSGL") was the tenant of many hundreds of leasehold retail properties from which the group traded. In relation to most of those properties rent was payable quarterly in advance on the usual quarter days (25 March, 24 June, 29 September and 25 December). On 25 March 2012 approximately £10 million in rent became due under the various leases. It was not paid. The group entered administration on the following day. Some stores were closed down immediately; but trading continued in other stores which were included in a swift sale of the business and assets of the group to Game Retail Ltd, which was not part of the group. We were told that approximately £3 million of the March rent remains outstanding in respect of those stores.
At the heart of the appeal is the question whether part of an instalment of rent payable in advance can be treated as an expense in the context of insolvency. Two decisions at first instance have decided that it cannot. In Goldacre (Offices) Ltd v Nortel Networks UK Ltd [2009] EWHC 3389 (Ch); [2011] Ch 455 HH Judge Purle QC decided that if a quarter's rent (payable in advance) fell due during a period in which administrators were retaining the property for the purposes of the administration, the whole of the quarter's rent was payable as an administration expense even if the administrators were to give up occupation later in the same quarter. The corollary of that decision is Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd [2012] EWHC 951 (Ch); [2013] 3 WLR 1132. In that case HH Judge Pelling QC decided that where a quarter's rent payable in advance fell due before entry into administration none of it was payable as an administration expense even if the administrators retained possession for the purposes of the administration. The rent is simply provable as a debt in the administration. Sensibly, the judge in our case (Mr Nicholas Lavender QC) simply followed those two decisions without sustained argument, and granted permission to appeal.
The landlords' appeal was presented by Mr Antony Zacaroli QC and Ms Hannah Thornley. The response of Game Retail Ltd was presented by Mr John McGhee QC and Ms Catherine Addy. The administrators, represented by Mr Daniel Bayfield, have taken a neutral stance.
One consequence of these two decisions is that it has become more common for companies to enter administration on the day immediately following a quarter day, thus avoiding liability to pay the rent in full even if they retain possession of their leasehold property. From the perspective of the landlords the position is exacerbated by a swift sale of the business to a new company that can, in effect, trade for the first three months rent free. Unsurprisingly, landlords are discontented with the legal position. Hence this appeal. 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. As Vaughan Williams J put it in Re New Oriental Bank Corporation (No 2) [1895] 1 Ch 753, 757:
"if a company which is in liquidation remains in beneficial occupation of a lease — that is to say, if it occupies the demised premises, or takes the rent, and thus obtains the benefit of the lease — the Court ought to do its very best to make the company pay the rent in full, and not merely a dividend."
The real question is whether in the light of a substantial body of case-law that result is open to us. In my judgment it is; and for the reasons that follow I would allow both the appeal and the cross-appeal.
Common ground
It is common ground that at common law rent (whether payable in advance or in arrear) is not apportionable in respect of time; and it is also common ground that rent payable in advance is not apportionable under the Apportionment Act 1870. The latter proposition is the result of the decision of this court in Ellis v Rowbotham [1900] 1 QB 470, although the landlords may wish to challenge its correctness if this case goes further. The application of the common law, as modified by the Apportionment Act 1870, is clear. For example as Mr McGhee QC rightly submits, in the absence of an implied term to the contrary, a tenant under a lease containing a conditional break clause must pay the whole of a quarter's rent payable in advance that falls due before the break date even if the period covered by that payment extends beyond the break date: PCE Investors Ltd v Cancer Research UK [2012] EWHC 884 (Ch); [2012] 2 P & CR 5. By the same token if a landlord forfeits for non-payment of rent he is entitled to recover as rent the whole of a quarter's rent payable in advance which fell due before the date of the forfeiture even if the forfeiture date is in the middle of the quarter covered by that payment: Canas Property Co v KL Television Services [1970] 2 QB 433.
It is also common ground that whether rent is payable as an administration expense is not a question of an exercise of the court's discretion. Either it counts as an expense, or it does not. If rent falls within the principle known variously as the "salvage principle," "the liquidation expenses principle" or "the Lundy Granite principle" it is an administration expense. If not, not. The origins and development of the principle, which I shall call the "salvage principle", were explained by Lord Hoffmann in Re Toshoku Finance Ltd [2002] UKHL 6; [2012] 1 WLR 671. However, since the point at issue in that case was a different one, it is necessary to go over some of that ground.
The landlords' argument
The essential point for the landlords is that whether rent payable in advance is apportionable at common law or under the Apportionment Act 1870 is irrelevant. The landlords do not seek to divide the rent in any way. What is in play is not the common law or the Apportionment Act, but the salvage principle. And that principle does not rest on any principle of the common law, but on the intervention of equity. Over the years that principle has been consistently applied, and operates as a gloss on the correct construction of the statutory rules of priority of debts both in liquidation and administration.
The contrary argument
The contrary argument is that the application of the salvage principle is crucially dependent on the date at which liability for rent accrues due. The only basis on which a liability can be apportioned is on a basis which applies generally across the law. There is no special rule applicable to cases of insolvency; and there is no equitable power to apportion. The cases consistently demonstrate that apportionment can apply only to cases of rent or other periodical payments payable in arrear. It cannot apply to instalments of rent payable in advance, the whole of which accrue due on the rent day. There is no unfairness about this. It is simply a consequence of modern landlords' choice to reserve rent payable in advance.
Provable debts and administration expenses
The basic definition of "debt" is found in rule 13.12 of the Insolvency Rules 1986. Rule 13.12 (1) says that it includes (a) any debt or liability to which the company was subject on the date when the company went into liquidation (or entered administration) and (b) any debt or liability to which the company may become subject after that date by reason of any obligation incurred before that date. It does not matter whether the debt or liability is present or future, certain or contingent or fixed or liquidated: rule 13.12 (2). Rule 13.12 (5) applies these provisions to administrations.
On the face of it liability to pay rent as it accrues due under a lease taken by the company before its entry into administration (or liquidation) is a liability to which it becomes subject as a result of an obligation incurred before the relevant date. Accordingly, it falls within the definition of "debt". The general rule is that all debts are provable: ...
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