A landmark ruling from the Court of Appeal involving the now insolvent retailer, GAME, has restored the balance between landlords and insolvent tenants. The Court has ruled that when a tenant is in administration, the rent payable for the premises they are continuing to occupy should count as an administration expense. Landlords (following the well-known Goldacre decision) were regarded as unsecured creditors once a tenant was in administration, meaning the landlord was in the unenviable position of having their premises occupied by a tenant who was not automatically obliged to pay rent which would otherwise properly be due.
In the Game case, as has been common practice for tenants entering administration, Game Group entered administration one day after the quarter rent was due and continued to trade. Under the then applicable case law, if a company entered administration the day after a quarter day, the rent for that quarter could go unpaid. This effectively transferred the burden to the landlord who suffered financial loss as a result of circumstances entirely out of its control.
The Court of Appeal decision effectively introduces a ‘pay as you trade’ scenario. While there will be few winners once a party has entered administration, a landlord’s right to the payment of rent on a pay as you trade basis means that rather than tenants in administration earning a right to the occupation of premises without the obligation to pay rent, landlords have obtained the right to be paid rent for the period in which a tenant in administration continues to occupy the premises.
As with many legal decisions, there remain uncertainties as to the impact of the decision and indeed how it will affect landlords. Pre-pack scenarios where insolvent going-concerns are sold on may well be affected by what will be an increased reluctance by administrators to continue in occupation of premises whilst a buyer is sought. Another consequence of shorter occupation by administrators will be units being handed back to landlords more quickly. That is great for desirable units but not such good news for properties which are more difficult to let as the responsibility for rates will return to landlords that much sooner.
The commercial property market will be watching the impact of this decision with interest.