A recent ruling by the Court of Appeal, in which some of the UK’s biggest landlords won a two-year battle to overturn the law of payment of rent during administration, will have ramifications for the retail sector, making it harder for retailers and their administrators to avoid paying rent while insolvent.
Firms that could have avoided making payments for three months if administrators were appointed shortly after the quarterly rent day will now have to pay rent on a “pay as you use” basis, which could be crippling, as the previous savings, often running into millions of pounds, provided a buffer for the rest of the business while restructuring took place.
The ruling, which was seen as a test case, centred on retailer Game, which called in administrators in March 2012 and now owes around £3m in back rent. Initially Game won the case when it was taken to court by a consortium of property companies claiming they were owed money but lost the case on appeal last month.
In a statement after the ruling, Game said that it “fundamentally changes the law in relation to the payment of rent in an insolvency context” and that it will have a “significant financial impact” on all landlords, tenants and insolvency practitioners involved in current and future business insolvencies in this country.
The firm argued vehemently against the law being changed on legal and commercial grounds and said it is now considering the possibility of an appeal to the Supreme Court.
However, if the loophole remains closed, in the future, administrators may seek earlier cost savings in order to pay landlords’ bills or the administrator may opt to move quicker to close stores and axe jobs.