Pillar Denton Ltd & Ors v Jervis & Ors

When an office-holder retains leasehold property for the benefit of an administration or winding up, payments calculated at the contractual rent must be made as insolvency expenses throughout the period of beneficial retention. Rent is treated as accruing from day to day, irrespective of whether it is contractually payable in advance or arrear and irrespective of the rent days.

This treatment does not apportion or alter the tenant’s liability. The equitable salvage principle instead determines how much of that liability receives priority as an expense. The period of beneficial retention is a question of fact.

A corporate tenant in the Game group failed to pay quarterly rent falling due one day before the group entered administration. The administrators continued trading from some leased stores and sold the business and assets relating to them to Game Retail Ltd.

Following Goldacre and Luminar, the deputy High Court judge held that none of the advance rent was an administration expense because it had fallen due before the administration. The landlords appealed. A contingent cross-appeal concerned whether rent falling due during beneficial occupation had to be apportioned if occupation ended during the quarter.

The central issue was whether part of an instalment of rent payable in advance could be treated as an administration expense under the equitable salvage principle.

1. Appeal and cross-appeal allowed. An office-holder must pay, as an administration or liquidation expense, an amount calculated at the contractual rate of rent for the whole period during which leased property is retained for the benefit of the insolvency process. Rent is treated as accruing from day to day. The relevant period is determined as a matter of fact, rather than by the occurrence of rent days: per Lewison LJ, with whom Sharp and Patten LJJ agreed.

2. The salvage principle is an equitable, judge-made deeming principle which informs the construction of the statutory rules governing insolvency expenses. It treats a liability incurred before insolvency as though it were incurred as an expense where the property is retained for the benefit of the insolvent estate. A liability’s status as a provable debt does not prevent its priority as an expense on the special facts required by the principle.

3. The common-law rule, and the effect of the Apportionment Act 1870, that advance rent is not apportionable do not govern this question. A true apportionment creates, reduces or transfers liability. The salvage principle does none of those things: the whole instalment remains a provable liability, while the part attributable to beneficial retention must be paid in full as an insolvency expense.

4. The principle depends on the actual period of beneficial retention. That period may begin after the insolvency starts and may end before physical possession is surrendered. Common sense and ordinary justice require payment for the value obtained by the estate, but do not require full payment for a later period during which the landlord is free to re-let.

5. Shackell and Atlantic Computer Systems represented the correct approach. Goldacre was overruled because it wrongly made an entire instalment falling due during beneficial retention an expense, even if occupation later ended. Luminar was overruled because it wrongly excluded rent falling due before the insolvency. The contractual “adoption” analysis derived from Powdrill did not apply to periodical rent.

1. Court of Appeal (Civil Division): The landlords’ appeal and the contingent cross-appeal were allowed. Goldacre and Luminar were overruled.
2. High Court, Chancery Division, Companies Court: Mr Nicholas Lavender QC, sitting as a deputy High Court judge, followed Goldacre and Luminar and granted permission to appeal. No neutral citation for that decision is stated.