The rules applying to rent due during the period of administration have been changed due to a Court of Appeal ruling involving high street chain Game Retail
The change opens the way for a new ‘pay as you trade’ approach for rent payments by companies which go into administration.
In its judgement in Pillar Denton Ltd & Ors v Jervis & Ors  EWCA Civ 180, the Court of Appeal said Game Retail must pay its former landlords £3m in back rent for the period before it went into administration two years ago.
The court ruled that rent for any period of occupation during an administration will now form part of administration expenses.
Four of leading UK landlords - including British Land and Intu Properties - took the case to court, arguing that under current law, retailers were able to benefit from rent-free trading at the landlords’ expense.
They argued that an equitable ‘salvage’ principle should apply and rent should be paid for the time the property was used during administration.
KPMG restructuring partner, Brian Green, said the judgement sees common sense prevail.
‘While not necessarily a game-changer for the insolvency profession, it is the welcome correction of an anomaly which stretches back over many years,’ said Green.
Previously a company in administration on a day when a rent payment was due had to pay that rent in full, regardless of whether the business continued to occupy the property. However, a company which went into administration the day after the quarter day payment was due was not required to pay the rent for that quarter.
Devi Shah, partner at Mayer Brown said that the date upon which a quarter’s rent becomes payable is irrelevant.
‘As the legal loophole on rent free occupation has effectively been closed, we will hopefully see more collaboration between landlords and administrators with a clearer focus on the viability of businesses,’ said Shah.
Phillip Sykes, deputy vice-president of insolvency trade body R3, said that teating rent as an administration expense may mean a smaller pot for a business’s creditors as a whole.
‘But at least the administrator will now know, and be able to make provision for the costs involved, in an administration. Extra clarity can make the difference between a business being rescued or not. After this decision, administration expenses should be a fairer deal for landlords and businesses,’ said Sykes.
In a statement, Game said made a provision against the potential rental payment in its accounts for the year to July 31 2013. The company described the Court of Appeal decision as having a ‘significant financial impact’ on landlords, tenants and insolvency practitioners.
Game is also considering the possibility of an appeal to the Supreme Court.
For the full ruling go here