Company – Administration – Rent – Company tenant of leasehold retail properties
 EWCA Civ 180
24 February 2014
Court of Appeal, Civil Division
Lord Justice Patten, Lord Justice Lewison and Lady Justice Sharp
Antony Zacaroli QC and Hannah Thornley (instructed by Berwin Leighton Paisner LLP) for the landlords.
Daniel Bayfield (instructed by Linklaters LLP) for the administrators.
John McGhee QC and Catherine Addy (instructed by Macfarlanes LLP) for the tenant.
Company – Administration. The issue on appeal was the treatment of rent payable under a lease held by a corporate tenant that entered administration. The judge had held that part of an instalment of rent payable in advance could not be treated as an expense in the context of insolvency. The parties appealed. The Court of Appeal, Civil Division, in allowing the appeal, held that the salvage principle applied. Accordingly, the administrators had to make payments at the rate of the rent for the duration of any period which they retained possession of the demised property for the benefit of the administration.
The judgment is available at:  EWCA Civ 180
The issue on appeal was the treatment of rent payable under a lease held by a corporate tenant that entered administration. The question arose in the context of the administration of a group of companies. One of the companies in the group was the tenant of many hundreds of leasehold retail properties from which the group traded. In March 2012, approximately £10m in rent became due under the various leases. It was not paid and the group entered administration on the following day. Approximately £3m of the March rent remained outstanding in respect of those stores. The judge, following Goldacre (Offices) Ltd v Nortel Networks UK Ltd (in administration) ( All ER (D) 54 (Jan)) (Goldacre) and Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd (in administration) ( 4 All ER 894) (Leisure), held that part of an instalment of rent payable in advance could not be treated as an expense in the context of insolvency (see  EWHC 2171 (Ch)). The parties appealed. The landlords contended that whether rent payable in advance was apportionable at common law or under the Apportionment Act 1870 was irrelevant, as the salvage principle applied and that principle did not rest on any principle of the common law, but on the intervention of equity. The tenant contended that the application of the salvage principle was crucially dependent on the date at which liability for rent accrued.
It fell to be determined whether the salvage principle applied.
The appeal would be allowed.
The fact that rent payable in advance was not apportionable under the Act did not lead inevitably to the conclusion that the salvage principle did not apply. A true apportionment either relieved the tenant from part of the liability for rent or transferred liability from one tenant to another. However, in cases to which the salvage principle applied, there had been no termination of the lease and no change of tenant. The whole of the instalment of rent that fell due was a provable debt, so the tenant remained liable to pay it. Whether that liability was satisfied by a dividend or by a payment in full was not a question of apportionment. The application of the salvage principle neither created nor transferred any liability. What it did was to treat part of a single liability as an insolvency expense, by requiring that it be paid in full. The stark division between rent that fell due before the date of entry into liquidation or administration and rent that fell due after that date did not correspond with the rule that the salvage principle did not take effect until the office holder actually retained beneficial possession of the property for the benefit of the insolvency (see , , ,  of the judgment).
Leisure had lost sight of the fact that the salvage principle was grounded in equity and not on the common law. How the common law would view an instalment of rent payable in advance was not determinative of how equity would treat it and Leisure would be overruled. The ‘wait and see’ approach to advance payments falling due during a period of beneficial retention represented the correct application of the salvage principle. Goldacre had been wrong to apply the ‘adoption principle’ and would be overruled (see , ,  of the judgment).
The fact that the rent had not been apportionable under the Act had not necessarily ousted the salvage principle. The true extent of the principle was that the administrators had to make payments at the rate of the rent for the duration of any period which they retained possession of the demised property for the benefit of the administration. The rent would be treated as accruing from day to day. Those payments were payable as expenses of the administration. The duration of the period was a question of fact and was not determined merely by reference to which rent days occurred before, during or after that period (see , , ,  of the judgment).
Shackell & Co v Chorlton & Sons  1 Ch 378 applied; Atlantic Computer Systems plc, Re  BCLC 729 applied; Goldacre (Offices) Ltd v Nortel Networks UK Ltd (in administration)  All ER (D) 54 (Jan) overruled; Leisure (Norwich) II Ltd v Luminar Lava Ignite Ltd (in admin)  4 All ER 894 overruled.
Decision of Nicholas Lavender QC  EWHC 2171 (Ch) Reversed.