Salvage Value: New Approach To Rent Recovery In Administration

Salvage Value: Court of Appeal decision heralds new approach to recovery of rent claims by creditor landlords against commercial tenants in administration

Following the recent Court of Appeal decision in Pillar Denton Ltd (and others) v Jervis (and others) (Game Station Ltd, Re), creditor landlords seeking recovery of rent from tenants in administration are likely to find themselves in a better position than before.

In Pillar Denton Ltd (and others) v Jervis (and others) (Game Station Ltd, Re) [2014] EWCA 180, a case concerning the administration of the Game group of companies, the Court of Appeal of England and Wales has over-ruled the previous law on the treatment of rent falling due both before and after the appointment of administrators.

Background

Game was the tenant of hundreds of retail properties throughout the UK. Rent for most of the properties was payable quarterly in advance. On 25 March 2012, rent of approximately £10 million was payable, which Game failed to pay and the company went into administration the following day.

The Earlier Law

In terms of earlier decisions (Goldacre (Offices) Ltd v Nortel Networks UK Ltd (In Administration) [2009] EWHC 3389 (CH), [2010] Ch 44 and Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd (In Administration) [2012] EWHC 951, [2013] 3 WLR 1132), rent falling due before an administration did not qualify as an expense of the administration, even where the administrators continued to use the property for the benefit of the administration. In those circumstances, creditor landlords ranked alongside ordinary creditors and required to prove their claims in the administration process.

This earlier law could be similarly prejudicial to administrators occupying properties on a quarter date, who incurred liability for a whole quarter's rent notwithstanding that they did not use the properties for the entirety of that quarter.

Game: High Court Proceedings

In an application by the administrators for directions, the High Court found itself bound by Goldacre and Luminar. The landlords appealed, submitting that the salvage principle applied to allow full payment of rent as an expense in the administration.

Appeal Proceedings

The Court of Appeal held that the salvage principle arose by operation of law and that it operated as a gloss on the interpretation of the relevant statutory scheme which contained a complete list of qualifying expenses in an insolvency process. The principle was a judge-made deeming...