Four years after a landmark legal ruling the Court of Appeal has stepped in to close an administration loophole that could have cost property owners millions of pounds in lost rent. The judgement has been described by one leading commercial agent as a “real game changer for landlords”.
In 2010 the High Court ruled that if a quarter’s rent, payable in advance, fell due during a period in which administrators were retaining a property for administration purposes, then the whole of the quarter’s rent was payable as an administration expense, even if the property was vacated days or even months later.
“The consequence of this decision,” explained Samantha Jones (pictured), a surveyor with commercial agents Prop-Search and Northamptonshire’s Dealmaker of the Year, “was that it became increasingly common for companies to go into administration on the day immediately after a quarter dates to avoid paying the quarters rent in full.”
The latest Appeal Court ruling was prompted by the 2012 collapse of the Game Station retail group. Almost all the quarterly rents due on the retail properties it leased — around £10m in total — fell due on 25 March. The group entered administration the following day in a clear attempt, the court felt, to take advantage of the High Court ruling two years earlier.
Whilst some Game Station stores were closed immediately, several continued to trade in a new business which was rapidly sold to a separate company called Game Retail Limited.
Overruling the 2010 judgement, the Court of Appeal found in favour of the retail group’s landlords and held that when a company enters administration or liquidation it is immaterial whether this happens before or after a quarter day.
Underscoring the landmark ruling, the court stated that if leased premises are used for the purpose of the administration or liquidation, then the passing rent is payable as an administration or liquidation expense for as long as the office holder makes use of the premises. Any rent due should be calculated on a day-to-day basis.
“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,” explained Jones. “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.”
Landlords still need to be cautious, added Jones. “It will be interesting to see whether this issue goes to the Supreme Court, given the significant impact that it will have on the conduct of administrators,” she concluded. “But, for the moment at least, the position seems to be clear and considerably fairer for landlords.”
