It has been understood since the Hindcastle case in 1997 that a guarantor’s payment obligations under a lease survive disclaimer by an insolvent tenant’s liquidator.  What has been less clear is how that works, given that the tenant’s obligation to pay rent dies when the lease is disclaimed.

Schroder Exempt Property Unit Trust and another v. Birmingham City Council [2014] EWHC 2207

Summary

A landlord is liable for business rates where a tenant's lease is disclaimed, even if the landlord does not take possession of the property following a disclaimer.

Background

Most Landlords, and Insolvency Practitioners (“IP”s), will be well aware of the issues and liabilities that can arise where a tenant (whether it be a company or individual, residential or commercial) experiences financial difficulties. Competing interests can lead to difficulties for all parties and, potentially, legal disputes.

Overturning two significant recent decisions, the Court of Appeal has held that whenever a rent payment day falls, from the moment a company in administration beneficially retains property, it will ordinarily be liable to pay rent as an expense for the period of that beneficial retention.

In a landmark decision Pillar Denton Ltd and Others v Jervis and Others [2014] EWCA Civ 180, a group of the UK's largest landlords have successfully overturned previous High Court cases that had allowed insolvent tenants to continue trading from their premises without paying rent. The landlords in this case, which involved the retailer GAME, have been allowed to recover £3,000,000 in outstanding rents from the period of the tenant's administration.

Prayers are answered in the Gamestation verdict, reports Richard Palmer, as the liability of administrators of insolvent companies to pay rent has been clarified.

But is it GAME over?

Pillar Denton Ltd and Others v Jervis and Others [2014] EWCA Civ 180

Summary – What happened?

A group of the UK's largest landlords have successfully overturned previous High Court decisions that had allowed insolvent tenants to continue trading from their premises without paying rent. The landlords in this case, which involved the retailer GAME, have been allowed to recover £3,000,000 in outstanding rents from the period of the tenant's administration.

24 February 2014
[2014] EWCA Civ 180
Court of Appeal (Patten, Lewison and Sharp LJJ)

The fact that rent payable in advance had fallen due prior to the tenant company entering administration did not prevent that that rent being payable an expense of the liquidation of the tenant company under the salvage/Lundy Granite principle.  The amount of rent so payable was a question of fact.

In recent years some high profile (and controversial) court decisions have swelled the list of liabilities that must be paid as expenses of an administration. Administration expenses enjoy "super priority", being payable out of floating charge realisations ahead of the claims of preferential creditors and floating charge holders. So, when an otherwise unsecured claim ranks as an administration expense, it clearly benefits the relevant creditor, but at the expense of the floating charge holder.

If a company goes into liquidation, the liquidator is able to disclaim the whole of an insolvent tenant’s liability under a lease. The disclaimer ends all of the tenant’s rights, interests and liabilities, effectively meaning that the tenant can get out of the lease early. This can have a significant impact on a landlord, whose expected income from the property suddenly comes to an end.