Award Winning
commercial property solutions
The UK Supreme Court has refused the retailer Game’s application to appeal a Court of Appeal decision in a case about whether companies entering administration should be able to continue trading while defaulting on rent payments says commercial property agent Prop-Search.
The Court of Appeal’s decision in February 2014 overturned previous case law under which landlords were ranked among other unsecured creditors of an insolvent business, even where the administrator continued to trade from the premises.
Samantha Jones, an Associate Director at Prop-Search, said: “This decision by the Supreme Court is welcomed as it brings to an end the uncertainty experienced by 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.”
In 2009, the High Court found 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, even if the administrators only made partial use of the leased premises or for only part of the rent period. This appeared to be a victory for landlords, as administration expenses are typically paid in full; and became known as the 'Goldacre principle', after the company involved in the case.
However, in April 2012, the court confirmed a flip-side of the Goldacre decision in a case involving the collapsed nightclub chain Luminar. Here, 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.
Samantha Jones added; “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.”
In this most recent case, one of the companies in the Game Station group was the tenant of numerous leasehold retail properties from which the group traded. Most of the leases provided for rent to be payable quarterly in advance on the usual quarter days, as a result of which on 25 March approximately £10,000,000 in rent became due under the various leases. The group entered into administration on 26 March. 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.
The Court of Appeal found in favour of the appellant landlords of the Games Station group which had entered administration one day after the March quarter day, on 26 March. The Court 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.
Samantha Jones concluded; “There is now no confusion to what rent is payable. If an administrator, for example, 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. However, 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.
Further information or advice can be obtained from Prop-Search - Tel: 01933 223300 / 01604 492000 or its website: www.prop-search.com