Until the decision in this case, administrators had typically waited until an advance payment of rent was due before formally entering into administration, as this tactic almost certainly provided a rent free period. In many cases the administrator would effect a quick sale of the business and obtain a rent free period. This practice arose following a previous court decision where rent owing during the period of administration was quantified as an unsecured debt and thus the landlord had to take a share of any left over monies, if any, alongside other creditors.
In the Games Station case, the tenant rented many hundreds of properties from which the Game group traded. The company went into administration on 26 March 2012, a day after the advance payment of the quarter rent fell due. The company did however continue to trade from many of its premises during the period of administration and accrued an outstanding rent debt in respect of the stores of approximately £3m.
The Court of Appeal however took the view that rent should be deemed to be an expense of administration in cases where the liquidator or other office holder retains the property for the benefit of the winding up or administration. Rent payments which were due before entering into administration will therefore accrue in full on a day by day basis during the administration period and thus will have priority over unsecured debts. As a result, administrators will no longer be in a position to negotiate a low payment of rent or remain in the property rent free.
Landlords will no doubt be relieved that this legal loophole has been closed and they should now be paid in full for any period that the administrator uses the demised property for the benefit of administration, irrespective of the date the tenant goes into administration. However, leave has been obtained for the case to proceed onto the Supreme Court so their judgment in the issue will be awaited in due course.
The above is not legal advice; it is intended to provide information of general interest about current legal issues.
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