A clutch of Britain’s biggest landowners who together count for about £100 billion of commercial property have won a landmark High Court battle to prevent tenants wriggling out of unpaid rent when they go under.

But property experts fear that the case represents just a new dawn of ruthless tactics that buyers — in particular private equity firms — of British retailers will use to avoid paying rent when they close under-performing outlets.

Parent company guarantees frequently cover rent and, according to the property agents Donaldsons, account for about £38 billion of the value of the £380 billion of property held by UK institutions and listed property companies.

The case concerned the demise of Powerhouse, once the UK’s third largest electrical retailer, and the honouring of parent company guarantees to bust subsidiaries.

Bringing the action against Powerhouse and the supervisors of the CVA from Smith & Williamson were Prudential, Legal & General, Land Securities, Derwent London and Hammerson — all represented by Lovells, the City lawyers. Another group including Scottish Widows and Standard Life Investments also joined as claimants and hired lawyers from Addleshaw Goddard.

New Zealand’s Pacific Retail Group paid £17.4 million in February 2003 for the assets of Powerhouse, then trading out of 134 stores.

The company got into financial trouble and closed stores. In February last year, Powerhouse said that it would close 35 outlets and proposed a company voluntary arrangement (CVA) with creditors, leaving 53 stores to trade from.

The terms of the CVA, voted through by trade creditors, included stripping out the rights of the guarantee provisions between Powerhouse and its new parent, PRG, to pay up on overdue rent, which would have wreaked havoc on the landlords.

Mr Justice Etherton ruled however: “For all those reasons I hold, in relation to the second preliminary issue, the CVA unfairly prejudices the interest of the claimants as creditors within the meaning of IAs.6(1)(a)\[the Insolvency Act\].”

But Charles Woollam, the investor services partner at Donaldsons, said: “With the rapidly changing ownership of such companies, particularly with private equity, you have to make sure cast iron guarantees are in place. Most firms do not even rely on guarantees, hoping parent companies will bail them out to protect their reputation. These may now be false assumptions. Companies have tried the legal route to escape them. There will be no shortage of parents refusing now to stand by their subsidiaries.”

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