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Administration rents ruling is a killer for stores

Darina Kerr, Partner at UK corporate and commercial law firm Dundas & Wilson.

Darina Kerr

Darina Kerr

On Monday February 24, some of the UK’s biggest landlords won a two-year legal battle to overturn the law on payment of rent during administrations. British Land, Intu, Hammerson and Land Securities successfully set a legal precedent that will help them recover circa £3m in unpaid rent. But while landlords celebrate, store staff and suppliers to fashion retailers may suffer as, in future, administrators could seek earlier cost savings in order to pay landlords’ bills.

Until recently, if a retailer like Jane Norman or Internaçionale fell into administration, the administrator usually benefitted from a ‘grace period’ where they paid little or no rent. This might last for three months depending on the date of the administration and the lease terms, and meant such companies could potentially save millions in rent. This saving provided a buffer for the rest of the business while the administrator battled to save it. Following the court’s ruling, this has all changed.

On Monday, the Court of Appeal ruled that the administrators of entertainment technology retailer Game Group would have to pay rent on a ‘pay as you go’ basis. There will be no ‘grace period’ and rent will be paid in full immediately by the administrator, provided they continue to use a property.

In practice, this will mean the administrator may opt to move quicker to close stores and axe jobs. If administrators are not using a particular property, then they don’t need to pay for it in full immediately. If they are using it, however, they must now pay rent in full. Without the grace period, suppliers may find that administrators act quicker to end contracts or negotiate to pay on reduced terms to make up cash shortfalls needed to pay the rent.

The last five years have seen many famous names fall into administration - from Nicole Farhi, Republic, Ethel Austin to La Senza. Administration gives retailers a chance to restore financial health. But, following the Game case, it is possible that it may become more kill than cure in cases where administrators act quickly to close stores and review supply contracts.

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