Landlords of Game go to Court over treatment of rent on administration

According to Property Week four landlords, together with administrator PwC, have asked the court to clarify whether rent should be paid as an administration expense. Game went into administration on 26 March 2012, one day after the company's quarterly rent payments were due. The timing meant that administrators did not have to pay a quarter's rent, despite continuing to trade from the stores.

"There is a strong feeling among landlords that a point of principle has to be made," the landlords – Land Securities, Hammerson, Capital Shopping Centres and British Land - told Property Week. "We would like to see a pay-as-you-trade arrangement for space which suits both landlords and retailers."

Private equity firm OpCapita purchased Game from the administrators in April 2012, but would not have been liable for any rent until the next 'quarter day', at the end of June. According to Property Week, depending on the outcome of the case the firm will be liable to pay most of the outstanding rent.

Trade bodies for the insolvency and commercial property sectors have called on the Government to overturn the strict rules on whether rent will count as an expense of the administration or be classed as an unsecured debt, which will likely go unpaid. In a joint statement in October last year, insolvency trade body R3 and the British Property Federation (BPF) said that the current position gave companies an incentive to appoint administrators just after 'quarter day', the traditional deadline for quarterly advance payment of commercial property rent.

The rules stem from the 2009 Goldacre court decision, in which the judge found that any rent falling due after administrators were appointed would automatically rank as an expense of the administration. Where this is the case, landlords will almost always be paid off in full before other debts are settled.

The Goldacre decision was confirmed in April last year in a case involving insolvent nightclub operator Luminar. In this case, the court said that rent should not be treated as an expense of the administration if it falls due before their appointment, even where the administrators continue to trade the business from the rented premises for part of the rent period. With commercial property rent payable on a quarterly basis, administrators can legally trade the business from the rented premises for as much as three months while landlords will only be 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. 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.

Property law expert Stuart Wortley of Pinsent Masons, the law firm behind Out-Law.com, said that it was "almost certain" that the first instance judge in the landlords' action would follow the Goldacre and Luminar decisions and that the issue would need to be taken to the Court of Appeal. However, he pointed out that the clarification which the parties were seeking might be rendered unnecessary depending on the outcome of a future Supreme Court decision.

In May, the Supreme Court is due to consider the issue of administration expenses 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," he said. "The outcome of that case is likely to have significant implications for administration expenses generally."

"The general consensus is that the rigid rules which result from the Goldacre/Luminar decisions are inconsistent with the purpose of administration. They are also unhelpful and have contributed to the recent trend in the retail sector - of which Game is but one example – for large numbers of administrations taking effect soon after each quarter day," he said.

"A return to a 'pay as you trade' system, as called for by the group of landlords and PwC, is more appropriate to administration. Provided that the insolvency practitioners act responsibly, and they usually do, all parties are better served by the pay as you trade system," he said.