Landlord giants win unpaid rent appeal after Game's collapse

The ruling was seen as a test case and will have ramifications for the retail sector, making it harder for retailers and their appointed administrators to avoid paying rent while insolvent and giving greater priority to landlords. From now on, throughout an administration process, rent must be paid on a ‘pay as you trade’ basis, regardless of when the retailer filed for administration.

Game will have to pay £3m in unpaid rent as a result of the hearing, which it said it has “already accounted for”. It comes at a critical time for the entertainment retailer, which is reportedly looking to float.

A Game spokesman said: “The real ramification of this decision is, however, 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.”

Game said it “strongly argued” against the law being changed on legal and commercial grounds and “is now considering the possibility of an appeal to the Supreme Court”.

Landlords Land Securities, Hammerson, Intu and British Land went to the Court of Appeal to argue that they unfairly missed out on unpaid rent when Game collapsed in March 2012.

Landlords claim that the “new Game” was able to operate rent-free for three months because of the legal loophole. Under the existing law, rent that is due during an administration is payable as an expense if the business continues to use the property. However, if a company files for administration just before quarterly rent day and administrators are appointed within 10 days, the rent can legally go unpaid.

Hammerson Head of Credit Control Duncan Grubb said: “The previous system was deeply unsatisfactory for both landlords and insolvency practitioners and this judgement provides a workable, common-sense resolution to the payment of rent as an administration expense.

“This judgement will significantly change the relationship between landlords and insolvency practitioners, and will hopefully lead to more collaboration when dealing with critical situations. Corporate restructuring will now be focused purely on trading patterns and the viability of the ongoing business, rather than on rent free periods from landlords provided by a legal loophole.”

Intu asset management director Kate Grant said: “This was the only possible fair outcome of the case, and one where common sense prevailed. We believe that all suppliers should be treated fairly; why should a company in administration still have to pay their utility bill, but not their rent. By working together, the landlords have closed a damaging loophole and now we can look forward to a productive and collaborative relationship with insolvency practitioners and retailers.”

Lord Justice Lewison, giving the leading judgment, said administrators and liquidators “must make payments at the rate of the rent for the duration of any period during which [they] retain possession of the demised property for the benefit of the winding up or administration.  The rent will be treated as accruing from day to day.  Those payments are payable as expenses of the winding up or administration.  The duration of the period is a question of fact and is not determined merely by reference to which rent days occur before, during or after that period”. 

Law firm BLP acted for the landlords. Its real estates disputes partner Michael Metliss said: “This decision is a landmark one and should bring welcome clarity to what has become a contentious area of law in recent years.

“The landlord community will welcome the decision, knowing that they will receive payment for the use of their property by companies in administration.” 

Chris Alexander, associate solicitor in the property litigation department at SA Law, said the ruling will enable landlords to get a “slightly better deal than previously” but cautioned that insolvency practitioners may be more inclined to shut shops faster in an administration process as a result.