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Court of Appeal ruling benefits landlords

The Court of Appeal has ruled that administrators of a business must pay the full rent for the period a property is used for the benefit of an insolvency, whether the rent is payable in advance or in arrears.

As a result of this ruling, our advice to landlords is that you should seek legal advice before automatically forfeiting a lease when your tenant goes into administration, as forfeiture might not be your only legal option and may not be the best one.

Lord Justice Lewinson said that rent should be treated as accruing from day to day, and should be payable as an expense of the winding up of the company. He also said that the law had been left in a "very unsatisfactory state" by previous High Court rulings on the issue.

The decision came as part of a case involving one of the companies in the Game group, which was the tenant of hundreds of leasehold retail properties.

Rent on most of the shops was payable in advance, and on 25 March 2012, around £10m in rent became due under various leases. The group entered administration the following day.

Trading continued in some stores, and some £3m of the March rent remains outstanding for those properties. The judge said one consequence of previous High Court rulings was that it had become more common for companies to enter administration on the day immediately following a ‘quarter day’, to avoid liability to pay the rent in full even if keeping possession.

"From the perspective of the landlords the position is exacerbated by a swift sale of the business to a new company that can, in effect, trade for the first three months rent-free. Unsurprisingly, landlords are discontented with the legal position."

Overruling two previous High Court rulings, he also said: "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."

Lewinson LJ allowed the appeal. Lord Justice Patten and Lady Justice Sharp agreed.

A spokesman for the British Property Federation said that organisations including British Land, Hammerson, Land Securities and Intu would now receive over £1m in overdue rent as a result of the Court of Appeal's ruling.

For more information regarding leases of commercial property please contact Richard Tomlinson at Lawson-West on 0116 212 1000.

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