Out-Law News | 02 Jul 2013 | 3:37 pm | 2 min. read
Appearing in front of the High Court's Chancery Division, the landlords successfully argued that the court would be bound by existing case law that states that administrators are not liable for rent that becomes due before administration, even if they continue to trade from the stores, Estates Gazette said.
Commercial property expert Stuart Wortley of Pinsent Masons, the law firm behind Out-Law.com said that the ruling had been expected, as any judgment by the High Court would have been bound by previous case law. In the 2009 Goldacre court decision, a High Court judge found that the full amount of rent falling due during the administrators' beneficial use of the premises would automatically rank as an expense of the administration, which are typically paid in full, even if the administrators only made partial use of the leased premises or for only part of the rent period.
This appeared to be a victory for landlords. However, in April last year in a case involving the collapsed nightclub chain Luminar, the court confirmed the logical flip-side to the Goldacre principle, which is that any rent falling due before administrators are appointed must instead be classed as an unsecured debt, which will usually go unpaid, even if the administrators subsequently use the leased premises during that rent period.
This has led to concerns that administration appointments will be timed to occur after rent payment dates so as to avoid the need to pay landlords as a priority in the administration for that rent period. Game went into administration on 26 March 2012, the day after the traditional March 'quarter day' deadline for quarterly advance payment of commercial property rent.
As matters stand, with commercial property rent often payable on a quarterly basis, administrators can legally trade the business from the rented premises for as long as three months, protected from landlord enforcement action and with landlords only able to recover payment in the same way as other unsecured creditors.
Before the Enterprise Act came into force in 2002, whether or not rent was payable as an expense of an administration was a matter for the court's discretion based on balancing the interests of creditors as a whole against prejudice to the creditor in question. A convention developed under which most administrators would pay landlords the rent for the period during which and to the extent towhich premises were used, calculated on a daily basis from the date of their appointment until the date on which the premises were no longer required. However, the Enterprise Act introduced a list of categories of expenditure which qualified as administration expenses, meaning that there is no longer any scope for discretion.
"The decision of an appellate court cannot come soon enough," said restructuring expert Alastair Lomax of Pinsent Masons. "It is corrosive and counter-productive for the law in this area to encourage debtors, the insolvency profession and landlords to engage in a 'winner takes all' game of poker over when a corporate rescue procedure will be implemented."
"The insolvency expenses regime is there to provide a measure of protection to third parties who continue to be affected by the formal process post-appointment; it should not be a tool to be used by any party to gain advantage through the timing of the appointment. Despite the strategic advantages to be gained post-Goldacre, many will feel that the fairest solution lies in reverting to the proportionate 'pay as you go' approach which many had assumed to apply in the years preceding that decision."
The Supreme Court is also due to deliver judgment on the issue of administration expenses shortly, in the context of a case in which the Pensions Regulator was given first claim over an insolvent company's assets ahead of other creditors and the administrators' fees.