Greater clarity needed on treatment of rent on administration says industry

Insolvency trade body R3 and the British Property Federation (BPF) said that April's decision, involving insolvent nightclub operator Luminar, gave companies an incentive to appoint administrators just after a 'quarter day', the traditional deadline for quarterly advance payment of commercial property rent. Doing this allows administrators to trade the business from the rented premises for the remainder of the quarter without having to pay rent, they said, with landlords unlikely to recover payment from the insolvency process as unsecured creditors.

"It's daft that the administrators for a business in trouble and their creditors have to go to the courts to argue the nuance of the law on this," said Ian Fletcher, director of policy at the BPF. "The administrator is trying to save a company, and the landlord is facing a significant loss. I don't think either is looking for favours on this, just fairness - the old system of pay-for-what-you-use worked perfectly well before the courts set other precedents."

Struggling sports retailer JJB was placed in administration yesterday, just after September's 'quarter day'. The situation mirrors that of Game Group, which filed a notice of intention to appoint before quarter day in March and was ultimately placed into administration four days after rent fell due. Research by R3 suggests that 18% of retailers can be classed as 'zombie' companies, meaning that they are struggling to pay their debts as they fall due.

The Luminar decision confirmed that even where administrators continued to trade the business from the rented premises for part of the rent period, rent which fell due before administrators were appointed should not be treated as an expense of the administration. The judgement followed that of the Goldacre case, in 2009, in which the judge found that any rent falling due after administrators were appointed would automatically rank as an expense of the administration - meaning that the landlord would almost always be paid off in full before other debts were settled.

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. A convention developed under which most administrators would pay landlords the rent for the period for which 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. The Enterprise Act, however, introduced a list of categories of expenditure which qualified as administration expenses, meaning that there is no longer any scope for discretion.

Commercial property expert Stuart Wortley of Pinsent Masons, the law firm behind Out-Law.com, said that changing the law to give effect to the pre-2002 position was the "most logical way" to address the issue. However, Parliament would need to pass primary legislation or make changes to the Insolvency Rules in order to do so.

"The effect of the Goldacre decision is that, if a company in administration is using premises on a day on which rent falls due, the company is liable to pay rent for the whole period covered by that rental payment - even if the company intends to vacate the premises a few days afterwards. The effect of the Luminar decision is that if a company goes into administration on the day after rent has fallen due, the company is not liable to pay any rent at all until the following rent day," he said. "Both decisions simply reflect the legal principle that where rent is payable in advance, there is no scope for the rent to be apportioned on a daily basis."

A company's rental liabilities were of course only part of the picture in an insolvency situation, he said, but the current position gives companies which go into administration a "significant incentive" to do so immediately after a rent payment date – as well as "a significant incentive not to do so immediately beforehand".

R3 president Lee Manning said that recent case law had created a "horribly inequitable position" for both landlords and administrators depending on the precise timing of the administration.

"We are calling for greater clarity surrounding the issue of rent due in the event of an administration: whether it counts as an expense and over what period," he said. "The uncertainty of the cost of trading a company in administration is driving approximately 1,200 businesses a year directly into liquidation and hampering company rescue. We need to go back to a pay-for-what-you-use approach, which is fair to everyone. The law needs to be changed in order to support business rescue in the UK."