Some of the country's biggest landlords have won a two year legal battle, allowing them to overturn the law on payment of rent as an expense of an administration. British Land, Intu, Hammerson, and Land Securities successfully set a legal precedent on Monday (24 February 2014) that will enable them to recover some £3m in unpaid rent.

In what is being hailed as a landmark case, the Court of Appeal ruled that the administrators of the entertainment technology retailer Game Group would have to pay rent as an expense of the administration for the period during which the administrators used the properties. Rent was due to landlords, in advance of other creditors, even though the administrators were not in office on the quarter day.

Legal Background

Before the decision was made, the position was that if an administration appointment was made before the rent quarter date fell, the rent for the whole period would be payable as an expense of the administration, regardless of whether the company continued to occupy the property.

However, if administrators were appointed just after the rent quarter date, the rent payable would be an ordinary unsecured claim, regardless of whether the administrators continued to make use of the property. This made the date of appointment of administrators crucial, as companies in financial difficulty with multiple tenancies (particularly retail companies) would time administration appointments to avoid paying rent for the initial 3 months of their appointment.

Game Retail Limited

This issue came to a head in the administration of Game Retail Limited.

Administrators were appointed on 26 March 2012, one day after the quarter date requiring payment of rent for the next three months. Following the principles set out above, rent was not payable as an expense of the administration until the next quarter date fell. A number of landlords of properties leased by Game (including British Land, Intu, Hammerson and Land Securities) brought an action, arguing that it was unfair that the administrators were able to avoid paying millions of pounds of rent (as an expense of the administration) across the Game outlets for the first three months of office.

The decision in the case was made by the Court of Appeal this week and now administrators must pay rent as an expense of the administration on a "pay as they go" basis, so that rent is paid for the actual period of the occupancy of the leasehold property, on a day by day basis.

The decision will mean that appointments of administrators can be made at the most appropriate time for each particular case, without the rent quarter date playing such a crucial role in the timing. The decisions will likely result in the administrators having a better relationship with landlords allowing them to negotiate a more amicable result in the event of a transfer of the leasehold property. However, it does mean that administrators are now unable to utilise rent quarter dates to their advantage in the crucial early days of their appointment and expenses for this period are likely to increase as a result.

Darina Kerr, a partner in our distressed real estate team, has given a few comments on this to The Times.

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