voluntary administration in the past few months, partly to aid right sizing store networks and leases, a recent decision by Federal Court judge O’Callaghan could impact the way rent is paid for businesses that declare insolvency. In the ruling, in some circumstances, rent incurred during a business’ administration period could be recognised as an ‘expense relevant incurred’, and could be payable as a priority in a subsequent liquidation. In this case, PAS Group was ordered to pay Scentre Group all rent owing and accrued during its administration period after collapsing into liquidation. “Administrators are often appointed by directors in an effort to shrink physical store networks,” Retail Lease founder Stephen Spring told Inside Retail. “The general rule upon appointment of an administrator is the need to notify landlords about their intentions to use a landlord’s premises or not and further, the administrator can seek refuge for personal liability of rents for certain times whilst they work out what’s best for the creditors.” However, in the most recent ruling, it was found that landlords should be paid rent as a priority in the event of liquidation, and that there is no justification for not paying rent owed to landlords. “This latest case is a technical affirmation of long held principles, but in a practical sense, it will probably not help the retail industry in the long-term,” Spring said. “Why would an administrator, whose rent is too high in relation to sales, keep any shop open when in the end, those sales generated will go to landlords as a priority?,” Spring said. “Many administrators will shut up shop more quickly and head towards liquidation to preserve cash for fair distribution to all creditors and employees rather than deal with landlords.” A “fair outcome” for landlords Bradd Morelli, national managing partner at Jirsch Sutherland, agreed that the decision could impact retailers looking at restructuring through the voluntary administration process. “While potentially limiting restructuring options for a distressed retailer, it’s probably a fair outcome for landlords,” Morelli told Inside Retail. The ruling also highlights the difficult and sometimes contradictory environment retail finds itself in. In a somewhat similar case in April, the Federal Court ruled on the side of retailers, when the Colette Group was told it would not have to pay rent due on 93 stores due between the 1st and 14th of April. At the time, administrators Deloitte argued that due to the “extraordinary“ position Colette found itself in due to Covid-19, it should not be personally liable for ongoing rent, and not pay any rent, as doing so would deplete Colette Group’s resources and limit the benefit from a future sale as a going concern. The judge agreed, though with the recent court ruling falling in favour of the landlords, it seems both sides of the argument now have a legal leg to stand on in future cases. This story appears in the August 5, 2020, issue of Inside Retail Weekly.