2 July, 2014
by: Cripps Pemberton Greenish

For landlords, a tenant going into administration is hugely problematic. It is a double edged sword in the sense that the rent is often not being paid, and yet, to rub salt in the wound, the landlord’s ability to take action against the insolvent tenant to recover possession of the property is limited.

A landlord’s best hope will often be to put pressure on the administrator to pay the rent as an expense of the administration (and so, vitally, before the other creditors) whilst it is making use of the premises. If it is not using the premises, the administrator can be pressed to agree that the lease can be forfeit, so that the property can hopefully be re-let.

Against that background, case law developed over the last few years on the very question of when an administrator can be forced to pay the rent.

That case law essentially confirmed that an administrator was only liable to pay any rent that actually fell due whilst it was using the premises. However, the administrator would be liable to pay the rent going forwards where it was retaining possession of the premises for the purpose of the administration on the actual date that the rent fell due. In those circumstances, the rent for the entire rent period would be payable, even if the administrator gave up occupation before the next rent payment date.

Off the back of that case law, a practice soon developed of companies being placed into administration the day after a rent payment date and so being able to continue trading from the premises rent free until the next rent payment date.

However, in a recent landmark and eagerly awaited judgment, the Court of Appeal has overturned the old law.

The case related to the administration of the Game group. Game occupied hundreds of retail premises under leases which, for the most part, provided for the rent to be paid quarterly in advance on the usual quarter days. It went into administration on the day after the March quarter day owing an eye watering £10 million or thereabouts in rent under the various leases to a number of landlords.

The judge at first instance was obliged to follow the old law and so had to reach the conclusion that the administrator was not liable to pay any of the March quarter’s rent as an expense of the administration because on the March quarter date Game was not in administration. As such, the administrator was effectively awarded a 3 month rent free period.

Not surprisingly, with millions of pounds in unpaid rent at stake, a group of landlords appealed.

The Court of Appeal overturned the previous cases and held that the administrator should have to pay full rent for the actual period during which it retains possession of the premises for the benefit of the administration. The rent should be treated as falling due from day to day irrespective of when it falls due under the lease. This means that there should no longer be a windfall for the administrator (or indeed the landlord depending on the date of the administration), and a landlord should be paid for the period when the administrator retains possession of the premises. The Court of Appeal also reiterated that the rent should be paid as an expense of the administration.

Although administrations will of course remain a real headache for landlords, the Court of Appeal decision does achieve a much fairer balance between the interests of landlords and administrators/other creditors. It closes what was seen by many as a legal loophole which often left landlords significantly out of pocket, yet still unable to recover possession of their properties whilst they were being used for the administration.

That said, there is still some considerable scope for argument. For example, calculating the period over which the administrator has retained possession and therefore over which the rent should be paid could well be controversial. What constitutes “retaining possession for the purpose of the administration”? It is clear that the administrator does not have to be physically in occupation of the premises, but one can imagine all sorts of situations where there is room for argument as to whether or not they are actually making use of the premises. Also, what about service charges, insurance and other sums due under the lease? It is likely (and seems sensible) that, under the same principle, any sums due under the lease should be paid as an expense of the administration, whether or not they are reserved as rent, but there is no clear authority on this yet.

We now know that an application for permission to appeal the decision in the Game case has been made to the Supreme Court and so it is quite possible that we have not heard the last on the matter!