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Landlords win the Game 24 February 2014

In a decision that will delight landlords everywhere, the Court of Appeal has ruled today in Pillar Denton Ltd v Jervis [2014] EWCA 180 that administrators are bound to pay rent for the whole period during which they are making use of a property, regardless of when the rent fell due.  This decision overrules a recent first instance decision, Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd [2012] EWHC 951 (Ch), in which the judge held that administrators did not have to pay any rent for the quarter in which they were appointed, if the administration started after the rent payment day.  This litigation arose from the decision of the Game group of companies to enter into administration on 26 March 2012, one day after the March quarter day, which angered the company’s hundreds of landlords.  This case was brought by a representative selection of those landlords.

The Court of Appeal’s decision was given by Lewison LJ and is impeccably written.  It is long and detailed, at 32 pages.  It can be downloaded here.

It was agreed between all parties that if rent falls within the principle known as what Lewison LJ calls the “salvage principle” (also known as “the Lundy Granite principle”), it is an administration expense, and payable to the landlord.  Otherwise it is merely a debt, for which the landlord has to prove, equally with other creditors. 

Lord Hoffmann had explained the concept of the salvage principle in Re Toshoku Finance Ltd [2002] UKHL 6 at [29]:

“The principle … is thus one which permits, on equitable grounds, the concept of a liability incurred as an expense of the liquidation to be expanded to include liabilities incurred before the liquidation in respect of property afterwards retained by the liquidator for the benefit of the insolvent estate.”

The question for the court was whether such a principle applied even where the rent had already fallen due before the administration started. Rent payable in arrears can be apportioned under the Apportionment Act 1870. However, as a result of the decision in Ellis v Rowbotham [1900] 1 QB 470, rent payable in advance is not subject to the Apportionment Act. And payment of rent in advance is now not only the norm but universal.

The Court of Appeal’s decision in favour of the landlords was reached on the basis that the salvage principle will apply to all rent.  Lewison LJ explained it like this at [101]:

“The true extent of the principle, in my judgment, is that the office holder must make payments at the rate of the rent for the duration of any period during which he retains possession of the demised property for the benefit of the winding up or administration (as the case may be). The rent will be treated as accruing from day to day. Those payments are payable as expenses of the winding up or administration. 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. This, in my judgment, is the way that James LJ formulated the underlying principle in Lundy Granite itself.”

 Some thoughts

1.  Landlords will be pleased with this decision, but there is a possible suggestion of an appeal to the Supreme Court in [7]:  

“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.” (Emphasis added)

2.  It is not yet clear whether the same result would apply if the administrator were to cease to use part of the property for the purpose of the administration.  Would apportionment on the same basis apply in relation to the space occupied, as opposed to apportionment on the basis of time?  That was not part of the current dispute so the question was not considered by the court.

3.  The reference to the “Lundy Granite” principle comes from the case of Re Lundy Granite Co ex p Heavan (1870-71) LR 6 Ch App 462, which arose from a dispute after the company had agreed to take an assignment of a lease of Lundy Island.  Not wholly relevant, but I used to go on family holidays to Lundy Island when I was a kid.  The island lies in the Bristol Channel, just off Bideford, reached by a small ship called Oldenburg run by the Lundy Company.  It’s now run by the Landmark Trust and there are 20 or so holiday cottages available on the island (or you can take a day trip from Bideford or Barnstaple). My father was responsible for the construction of the pier on the island about fifteen years ago.  In my youth, we had to transfer to small boats in order to land.  It’s less exciting now, but much less dangerous.  Do try to visit if you are in the West Country.

4.  At [83], Lewison LJ says (in the context of landlords trying to demand rent for a period after the administrator has vacated):

“It may not be a maxim of equity, but in simple terms: you can’t have the penny and the bun.”

If that is not yet a maxim of equity, it should be.

5.  We will gloss over the fact that this is the second of five Court of Appeal cases handed down within a fortnight in which I have wrongly called the result.  I may be the only one hoping for a referral to the Supreme Court!

 

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