Jervis v Pillar Denton Ltd (Game Station) & Ors

This is an application for directions made under paragraph 63 of Schedule B1 to the Insolvency Act 1986, by the administrators of various companies in the Game Group of Companies, including Game Stores Group Limited.

The application concerns the treatment of rent, service charge and insurance payments due under the terms of five leases. These five leases were chosen as samples. The administration involves many more similar leases. In the case of each of these five leases the tenant was Game Stores Group Limited. The rent, service charge or insurance payments were under the terms of the lease payable in advance. In particular, quarterly rent payments fell due on 25^th March 2012, the day before the administrators were appointed.

The parties prepared a statement of agreed facts, which there is no need for me to repeat and which I adopt.

The Applicants are the administrators. The first six Respondents to this application are the landlords under the five leases and under various other leases which may be affected by this application. I will refer to these six Respondents as the Landlords. Although they are Respondents, it was in fact at their instigation that this application was brought.

The Seventh Respondent is Game Retail Limited. By a business sale agreement dated 1^st April 2012, Game Retail Limited acquired from the administrators the business of the Game Group. For that purpose the administrators gave Game Retail Limited a licence to occupy many, but not all, of the properties formerly occupied by companies in the Game Group. That includes the properties which are subject to four of the leases to which this application relates. These have been referred to as the Four Leases.

The fifth lease, which has been referred to as the Eldon Square Lease, concerns a property which has never been occupied by Game Retail Limited. The property was only occupied by the administrators in the sense that it took five days from 26^th March 2012 for the administrators to remove the goods of Game Stores Group Limited from the property. As I shall explain, there may in due course be an issue as to liability for rent and service charge for those five days.

The central issue which arises on this application is what, if any, part of the rent, service charge and insurance payments due under these leases should be treated as expenses of the administration, and therefore accorded the priority applicable to such expenses, rather than merely as debts provable in the administration. The striking feature of this case is that the administrators were appointed on the day after the quarterly rent fell due under the five leases.

It is agreed that the effect of recent authorities, to which I shall refer, is that the administrators were able to occupy the relevant premises for the remainder of the quarter without paying the rent due for that quarter and with that rent remaining simply as a debt provable in the administration.

It is also agreed that the effect of the recent authorities is that any quarterly instalments of rent falling due under the Four Leases during the administration will be payable in full as expenses in the administration even if the administration were to end on the day after the quarterly payments fell due. The recent cases to which I was referred are Goldacre (Offices) Limited v. Nortel Networks UK Limited [2010] Ch 455 and Leisure (Norwich) II Limited v. Luminar Lava Ignite Limited [2012] BCC 497. To summarise the effect of those cases I need do no more than quote from paragraphs 25 and 26 of the decision of His Honour Judge Pelling in Luminar, where he said:

“25.

In Goldacre (ante) the issue was whether the whole amount of the rent payable in advance that fell due for payment while the lease was retained by the administrator should be paid as an administration expense even though the administrator vacated during the period covered by the payment. HHJ Purle QC concluded that it was, for the reasons he identified in paragraph 20 of his judgment, namely that:

‘... a liquidator electing to hold leasehold premises can do so only on the terms and conditions contained in the lease, and that any liability incurred while the lease is being enjoyed or retained for the benefit of the liquidation is payable in full as a liquidation expense.’

26.

In summary, therefore, in my judgment the position is as follows:

a.

Where rent is payable in advance and falls due for payment prior to the commencement of the liquidation or administration, then it is provable but not payable as a liquidation or administration expense even though the liquidator or administrator retains the property for the purposes of the liquidation or administration for the whole or part of the period for which the payment in advance was payable;

b.

Where rent payable in advance becomes due during a period when the liquidator or administrator is retaining the property for the purposes of the liquidation or administration, then the whole sum is payable as a liquidation or administration expense even though the liquidator or administrator gives permission to forfeit or vacates before expiry of the period for which the payment in advance is due...”

The judgment then went on to deal with rent payable in arrears, as to which there is no dispute.

Counsel for Game Retail Limited has pointed out that Goldacre has been referred to without disapproval in a number of cases, that is to say: in the High Court by David Richards J in Re WW Realisation I Limited [2011] BCC 382; in the Court of Appeal by Lloyd LJ in Re Nortel GmbH and Bloom v. Pensions Regulator [2012] 1 All ER 1455; in Scotland in Chester West and Chester Borough Council [2011] BCC 174; and in Australia in Australian Securities and Investment Commission v. Letten (No. 13) [2011] FCA 1151.

The effect of the decisions in Goldacre and Luminar on the facts of the present case is agreed. It is set out in Schedule 2 to the statement of agreed facts. It is also set out in paragraphs 1.1 to 1.3 of the directions which I have been invited to make. Those directions are in the following terms:

“1In respect of the leases listed in the schedule hereto:

1.1

neither the quarterly rent which fell due in advance on 25th March 2012 nor any part thereof is payable as an expense of the administration of the tenant Company in respect of the Four Leases or the Eldon Square Lease;

1.2

no sums in respect of service charge nor any part thereof that fell due for payment in advance prior to the Administrators' appointment on 26th March 2012 and (a) which relate in whole or in palt to a period following the Administrators' appointment; and

(b)

remain unpaid, are payable as an expense of the administration of the tenant

Company in respect of the Four Leases or the Eldon Square Lease;

1.3

any sums in respect of rent, service charge and insurance or any part thereof that fell or fall due for payment in advance following the Administrators' appointment on

26th March 20 12 and at a time when the Administrators were using the store in question for the benefit of the administration are payable in full as an expense of the administration of the tenant Company in respect of the Four Leases notwithstanding that the Administrators may subsequently cease to so use the store in question before the end of the period to which such rent or service charge relates;”

It will be seen that: paragraph 1.1 of those directions gives effect to the decision in Luminar in relation to the rent which fell due on 25^th March 2012; paragraph 1.2 extends that to the amounts of service charge which fell due on 25^th March 2012; and paragraph 1.3 gives effect to the decision in Goldacre in relation to the Four Leases.

For the sake of completeness, I should mention paragraphs 1.4 to 1.9 of the directions which I was invited to make. These were not contentious and were not affected by the decisions in Goldacre and Luminar.

The Landlords wish to challenge the decisions in Goldacre and Luminar. As I have said, it is at their instigation that this application was brought. It is agreed that this application raises an issue which is of general importance in such cases. The Landlords made clear from the outset their desire to obtain a decision from the Court of Appeal.

However, so far as this Court is concerned, all parties, including the Landlords, are content that I should follow the decisions in Goldacre and Luminar. The position is summarised in paragraph 98 of Volume 11 of Halsbury’s Laws of England, which says as follows in relation to decisions of Courts of coordinate jurisdiction:

“There is no statute or common law rule by which one court is bound1 to abide by the decision of another court of co-ordinate jurisdiction. Where, however, a judge of first instance after consideration has come to a definite decision on a matter arising out of a complicated and difficult enactment, the opinion has been expressed that a second judge of first instance of co-ordinate jurisdiction should follow that decision; and the modern practice is that a judge of first instance will as a matter of judicial comity usually follow the decision of another judge of first instance unless he is convinced that that judgment was wrong.”

The law as stated in that passage was applied recently by Gloster J in the case of Lornamead Acquisitions Limited v. Kaupthing Bank HF [2013] 1 BCLC 73.

Accordingly, I accept that it is appropriate for me to proceed on the basis that Goldacre and Luminar were correctly decided. As I have said, the consequences on the facts of this case of those decisions are agreed and are embodied in the order which I have been asked to make, and which I do make.

However, I also accept the Landlords' submission, which is not resisted, that they should be given permission to appeal against paragraphs 1.1 and 1.2 of that order and, consequently, Game Retail Limited’s submission that it should be given permission to cross-appeal against paragraph 1.3 of the order. I say this for two reasons.

First, it is common ground that the appeal would have reasonable prospects of success. The proposed grounds of appeal are outlined in paragraph 26 of the Landlords’ skeleton and they are as follows:

“1.

The Lundy Granite principle [which is the principle being applied and interpreted in Goldacre and Luminar] is concerned with the use of property for the benefit of a liquidation or administration, and requires as a matter of “common sense and ordinary justice” that “the landlord receives the full value of the property. [and there is a reference there to the decision of the House of Lords in Re Toshoku Finance UK Plc [2002] 1 WLR 671, quoting at paragraph 23 from Lundy Granite itself.]

2.

The touchstone for the application of the principle is the use by a liquidator or administrator of the property for winding-up or administration: Toshoku at [26] citing Re Oak Pits Colliery Co.

3.

The principle is not concerned(unlike many other heads of expense in Rule 4.67(1)) with debts incurred by the administrator. As Lord Hoffmann pointed out in Toshoku at [27], the liability is plainly not incurred as an expense of the liquidation (or administration), because “the whole of the liability was incurred by the company before the winding-up for the whole term of the lease”.

4.

Instead, the principle is based on a fiction: " ... it would be just and equitable ... to treat the rent as if it were an expense of the winding up and to accord it the same priority": Toshuku, at [27].

5.

The fact that rent payable in advance under a lease cannot generally be apportioned. (due to the Apportionment Act) is not relevant to the question whether payment for the use of leased property should be treated as if it was a debt incurred by the company in administration for the period when the property was used for the purposes of the administration. Ellis v Rowbotham itself did not involve a liquidation and did not involve any consideration of the Lundy Granite principle3

.

6.

Put another way, whether or not the rent payable under the lease contract can be apportioned day to day, the amount which is payable pursuant to thefiction that the rent has been incurred as an expense of the administration is only that which is referable to the period when the property is.being used beneficially for.the purposes of the winding-up..

7.

HHJ Purle QC's conclusion was based on the decision of the House of Lords in Powdrill v Watson [1995] 2 AC 39, but the issue in that case was the different one of whether an administrator had "adopted" a contract, and so became liable for the liabilities accruing due under it post administration: it did not involve the application of the Lundy Granite principle.

Against that, Game Retail Limited outlined in paragraph 19 of its skeleton argument what the response to such an appeal would be. However, no purpose would be served by my reciting what is there said, since Game Retail Limited and the administrators did not dispute that the proposed appeal on the grounds I have quoted would have reasonable prospects of success.

Second, I also consider this is a case where there is “some other compelling reason why the appeal should be heard”. The issue on the proposed appeal is clearly one of general concern to landlords, to administrators and to others concerned with businesses in administration. The amounts involved are considerable. The Game Group paid over £12m per quarter in rent, a large part of it in advance. In those circumstances, it seems to me appropriate that the parties should have the opportunity to obtain a decision from the Court of Appeal.

I should mention that there is an issue which might arise on the proposed appeal. If the Court of Appeal were to decide that Goldacre and Luminar were wrongly decided, then the Landlords would contend that the administrators were liable for the rent for the period from 26^th to 30^th March 2012 under the Eldon Square Lease. However, that is a hypothetical issue only in this court and I agree that it would be a disproportionate use of the Court’s or the parties’ time for it to be argued before me or decided by me.

Accordingly, I therefore make the order sought in the terms agreed by the parties. I have dealt separately with the issues as to the costs for this application.