The Supreme Court has effectively brought to an end a legal campaign by retailers claiming that companies entering administration should be allowed to continue trading while defaulting on rent payments.
One of Britain’s biggest computer entertainment retailers, Game was challenging a February, 2014, Court of Appeal ruling that overturned case law precedents ranking landlords among other unsecured creditors of an insolvent business — even where the administrator continued to trade from the premises.
Welcoming this month’s Supreme Court decision, property expert Samantha Jones (pictured) said it now ends the uncertainty experienced by many landlords and insolvency practitioners.
“A number of commercial landlords successfully argued in the Court of Appeal that tenants must make payments at the rate of the rent for the duration of any period during which they retained possession for the benefit of the winding up or administration,” said the Associate Director of East Midlands commercial property specialists Prop-Search.
The latest ruling also ends a long-running legal wrangle sparked by a 2009 High Court judgment that the full amount of rent falling due during administrators’ beneficial use of an insolvent business’ premises would automatically rank as an expense of the administration. This applied even if the administrators only made partial use of the premises or for only part of the rent period.
The decision appeared to be a victory for landlords, said Jones, because administration expenses are typically paid in full. The ruling also became known as the “Goldacre principle”, after the company involved in the case.
Three years later, in April 2012, the High Court came down in favour of the “flip side” of its earlier Goldacre decision involving the collapsed nightclub chain Luminar.
This time the High Court held that any rent falling due before administrators are appointed must instead be classed as an unsecured debt — which will usually go unpaid — even if the administrators subsequently used the leased premises during that rent period.
“With commercial property rent usually due on a quarterly basis, this pair of decisions meant that administrators could legally trade the business from the rented premises for as long as three months, protected from landlord enforcement action and with landlords only able to recover payment in the same way as other unsecured creditors,” explained Jones.
In the Game Station case, one of the companies in the retail group was the tenant of numerous leasehold shops from which the group traded. The majority of leases demanded the rent should be paid quarterly, in advance, on the usual quarter days.
By the 25 March, the day before the end of quarterly period, around £10m in rent fell due under the various leases. However, the group went into administration the next day. Whilst some stores were closed immediately many continued to trade in a new business which was rapidly sold to a separate company called Game Retail Limited.
Last year’s Appeal Court ruling backed the Game Station group landlords and held that when a company enters administration or liquidation it is immaterial whether this happens before or after a quarter day. If premises leased by the company are used for the purpose of the administration or liquidation, the passing rent is payable as an administration or liquidation expense for as long as the office holder makes use of the premises and is to be treated, for that purpose, as accruing from day to day.
“With the Supreme Court judgment there is now no confusion to what rent is payable,” Jones stressed. “If an administrator trades from the company’s leasehold premises for three weeks, the equivalent of 21 days rent will be payable to the landlord as an administration expense.”
But, she adds, “after the administrator ceases to use the premises, no further rent will be payable as an expense even if a new quarter’s rent happens to fall due during that three week period”.
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