Wed 28 May 2014

Insolvent tenants: what should landlords do post "Game"?

Today being the 28 May, and a term day for rental payments in Scotland, and being within sight of the Midsummer quarter day in England (24 June), attention will turn to payment of rent and the cash flow pressure this places on all tenants, especially those with a large estate of rented properties. This will be only the second quarter day since the English Court of Appeal's decision in "Game", the litigation between the landlords, administrators and new tenants arising out of the March 2012 administration of the Game group of companies: Pillar Denton Ltd & Ors v Jervis & Ors [2014] EWCA Civ 180 (24 February 2014)].

In Game, the Court of Appeal overturned the existing approach in England, that an insolvency practitioner (IP) in possession of premises need only pay rent in advance as a liquidation expense in regards to those rent days that arose while he was in possession but, in that case, he had to pay for the whole of the rent period even if he vacated partway through. This had led to a practice whereby insolvencies would cluster immediately after the English quarter days, as rent had already become due before the insolvency and would not, therefore, rank as an expense of liquidation (merely as an unsecured claim). The landlord would therefore watch as the insolvency practitioner enjoyed up to three months rent-free.  As this period was often long enough to tidy up units, have closing down sales and pass on premises to purchasers, it was a significant boon to insolvency practitioners and a significant problem for landlords.

The old rule had an unexpected effect in Scotland (where the quarter days are timed differently) and slow-moving insolvency practitioner might find they were still holding premises when a Scottish rent became due.  Also, the old rule may have weighed on landlords to agree leases with rent in advance monthly (as the worst that could happen in insolvency was the IP enjoying up to a month rent-free). Notwithstanding the apparent boon to IPs, the old rule was also seen as unfair on them if they wished to occupy for only a few days after a quarter day but had to pay the full three months for the privilege.

In light of this apparent unfairness, the Court of Appeal altered the position on 24 February and held that, in correctly applying the English "salvage principle", IPs should pay rent as a liquidation expense equivalent to the period in which they are actually occupying and using the premises. This now means that if IPs take possession two days after the quarter day and remain in possession for two days afterwards, then they should only pay for the four days of occupation as an expense of liquidation.  In the words of Lord Justice Lewison (who delivered the leading opinion): "In simple terms: you can't have the penny and the bun. Equally, I cannot see that common sense or ordinary justice requires a landlord to be paid rent in full for a period after the office holder has vacated the premises, leaving the landlord free to re-let them." Conversely, he could not see the ordinary justice of an insolvency practitioner being able to enjoy the benefits of a lease for up to three months rent-free, denying the landlord both occupation and rental income.

The case is not binding in Scotland though most expect the Scottish courts will uphold the decision if the matter comes before them.  This is despite the Court of Appeal's decision being heavily rooted in the English principle of "Equity", which does not have a Scottish equivalent.  The Court of Appeal's decision does consider at detail the implications of the lease as a contract and one is tempted to wonder whether the Scottish courts, absent the "law of Equity", might be attracted to upholding only half the decision whereby insolvency practitioners must pay rent for a period that they are in occupation (if they take occupation after a rent day) but otherwise pay the contractual rent if they are in occupation over a rent payment day (even if they leave early). That is, after all, what any tenant would normally expect from a negotiation with a landlord and in terms of the lease contract.  If the IP is not taking over the contractual duties of the lease in regard to rent, what is his liability in regards to other lease costs or liabilities (eg damage to the premises) that occur while he is in occupation?

Moving away from the legal complexities, the decision begs the question as to how this may change matters for landlords and commercial letting debt recovery. In simple terms, it probably does not change much at all.  A landlord was always best advised not to prepare not just for the tenant's insolvency but for the more fundamental issue of non-payment. Tenants may fail to pay rent for any number of reasons and the cash flow burden of a rent quarter day remains a pinch point for tenants, regardless of the issue of payment of rent in insolvency.

Landlords are one of a small category of creditors who might find themselves being a "lender of last resort" when times get tough. A business can rarely operate without paying its employees or its major suppliers. They may, however, think that they can quietly delay on payment of rent.  Landlords however have an advantage over other creditors in that there are rarely grounds for disputing the debt (as the rent will be what the lease says it is) and they have the ability to have swifter processes, so as to be the first creditor who is able to take recovery action.

There is nothing surprising about a landlord's credit control aiming for prompt payment of rent by the rental payment day. Rental invoices should best be sent in advance, credit control is best started in advance of the payment date, with debt chasing starting within days of the due date if payment has not yet come in.  If the rent payment is late, as there is no reason for the tenant to be ignorant of the rent payment date, any excuses by the tenant should be critically and swiftly considered and appropriate debt recovery pressure applied thereafter if appropriate.

For any creditor, one of the best forms of credit control is simply knowing your debtor.  Know who you are doing business with and what pressures on the cash flow they may have.  This allows you to recover your debts more effectively and assess the veracity of any excuses for late or delayed payment. A landlord may have little knowledge of their tenant beyond the basics however. For this reason, compensating with tougher credit control, and using the advantages of speed of action, should not be underestimated.


If you'd like to speak to us, please contact our team.

Make an Enquiry

From our offices we serve the whole of Scotland, as well as clients around the world with interests in Scotland. Please complete the form below, and a member of our team will be in touch shortly.

Morton Fraser MacRoberts LLP will use the information you provide to contact you about your inquiry. The information is confidential. For more information on our privacy practices please see our Privacy Notice