With a spate of companies going into administration since the recession of 1988, especially chains of retailers, The Game Group being a prime example, arguments have arisen over who pays rent and service charges whilst the administrators are in charge.
In the case of The Game Group, which entered into administration last year, the administrators did not pay the companies’ outstanding rent and service charges, relying on two previous High Court rulings in Goldacre and Luminar to argue their case.
Overturning these, Lord Justice Lewinson LJ said the law had been left in a “very unsatisfactory position” by these two rulings, both of which he overruled.
He ruled that rent should be treated as accruing from day to day, and was to be payable as an expense of the winding up or administration.
This “game changer” of a ruling in Pillar Denton and others v Jervis and others  EWCA Civ 180 (Game Group PLC) where one of the companies in the Game group was the tenant of hundreds of leasehold retail properties, has been welcomed by commercial property owners.
In the Game case, rent on most of the shops (around £10m) was payable in advance, and on 25 March 2012, rent became due under various leases. The group entered administration the following day.
Following this, trading continued in many of the stores, included those in the sale of the business and assets to Game Retail, which was not part of the group. Around £3m of the March rent is still outstanding.
Judge Lewinson LJ pointed out that as consequence of High Court rulings in Goldacre and Luminar it had become common for companies to enter into administration on the day immediately following a quarter day when rent becomes due for the next 3 months, thereby avoiding liability to pay the rent in full even if they retain possession.
“From the perspective of the landlords the position is exacerbated by a swift sale of the business to a new company that can, in effect, trade for the first three months rent-free. Unsurprisingly, landlords are discontented with the legal position.”
This decision means that rents and service charges will now be payable as administration expenses whilst a lease is used for the benefit of an administration, even when they became due before the administration. Much is the case with utility bills, they will be paid for each day that properties are occupied.
Where the administrators continue to make use of leased properties during the administration process, they will now be required to pay rent.
A spokesperson for The British Property Federation (BPF) has commented that a “pay-as-you-go system” for retail administration increases fairness for landlords, who will receive the rent that they are due. The new ruling increases certainty for all as landlords get paid and insolvency practitioners can continue to trade to rescue of the business.