Leases and Insolvency

In this article we seek to highlight:

1. some of the issues facing landlords as a consequence of insolvency of a corporate tenant (“the tenant”);
2. issues arising from the appointment of an Administrator, Liquidator or Receiver and the implication(s) of the appointment from the perspective of the Corporations Act, 2001 (Cth) (“the Act”);
3. practical steps that can be taken by the landlord to protect their interest.

The type of insolvency appointment will determine when the Insolvency Practitioner’s obligation arises to pay rent and the landlords ability to enter into possession of the property.

1. Obligations to Pay Rent

• Receiver/Controller

The Act makes a Receiver (or Controller) liable for rent payable by a Corporate tenant seven (7) days after the control day¹ . A Controller may give the owner or lessor a notice under Section 419A(3) of the Act that states that he/she does not intend to exercise rights in relation to the property. If the Notice is not sent, the Controller is liable until:

i) the Controller retires; or
ii) the Corporation ceases to occupy the premises.

• Voluntary Administration

An Administrator is personally liable for debts incurred in the course of the Administration in respect of property hired or leased, used or occupied.

An Administrator is only liable for amounts payable under the lease:

i) for the period beginning five (5) business days after the Administration began; and where
ii) the company continues to occupy or be in possession of the property.

Within five (5) business days after the administration began, the Administrator may give the owner or lessor a notice under Section 443B(3) of the Act that states that the company does not propose to exercise rights in relation to the property. If the notice is not issued within five (5) business days of the administration commencing and the company continues to occupy the property, the Administrator becomes liable for ongoing rent and other monies owed under the lease.

• Liquidation

A Liquidator is not personally liable for rent during the liquidation (including any rental arrears). However, if the Liquidator decides that the Company will continue to occupy the premises, the rent for the period of occupation will be a cost of the winding up.

Section 568 of the Act gives power to a Liquidator to disclaim certain property of the Company, including a contract for a lease of land. The purpose behind this is to enable a Liquidator to relieve the company of obligations and liabilities which would otherwise prevent a prompt and efficient winding up of the Company’s affairs.

2. Rights of the Landlord to Possession

• Receivership

A Receiver is not provided with any protection under the Act (compare this to a Voluntary Administrator – refer below), which would limit the rights of the landlord. Consequently, a landlord may commence proceedings to gain possession or force compliance with the terms of the lease, notwithstanding the appointment of a Receiver.

• Voluntary Administration

During the Administration of a company the owner or lessor of property that is used or occupied by, or was in possession of the company cannot take possession of the property or otherwise recover it except:

i) with the Administrator’s written consent, or
ii) with leave of the Court.

This does not apply where the lease has already ended when the Administration commenced and the landlord has entered into possession. Notwithstanding the appointment of an Administrator, the landlord can still issue a Default Notice and Notice of Termination (where the tenant has failed to comply with the terms of the lease), the landlord will then be able to resume possession when the Voluntary Administration ends.

The landlord may make an application to Court under Section 440B of the Act to take possession of the property. In deciding whether to grant the landlord leave to recover the property prior to the conclusion of the Voluntary Administration, in a recent court case it was held that² :

i) The landlord bears the onus of proof of persuading the Court that leave should be granted;
ii) Leave should only be granted if it does not contradict the objective of the Administration;
iii) The prohibition on the landlord taking possession of property leased to parties under the Administration should be relaxed if the prohibition would be inequitable. (i.e. the lease has expired);
iv) It is necessary to balance interest of the parties. In doing so the benefit to unsecured creditors should not be at the expense of parties seeking to exercise property rights and the landlord from suffering losses by reason of the imposing of the moratorium.

• Liquidation

Normally, commercial leases are drafted so that an insolvency event is a default by a tenant under the lease. This would normally give the landlord the immediate right to terminate the lease in an insolvency event (except when a Voluntary Administrator has been appointed).

On appointment, a Liquidator will either seek to:

i) Disclaim the lease. That is, the Liquidator may take the view that the lease is an onerous contract; or

ii) If he/she requires the premises, a Liquidator should generally notify the landlord that continued occupation is necessary, however the Liquidator is unlikely to adopt the lease. He/she will only be liable for rent for the period they occupy the premises.

Where the Liquidator has not disclaimed the lease, a landlord may give a notice to a Liquidator requiring the Liquidator to nominate whether or not the Liquidator intends to disclaim the lease. The Liquidator must respond within 28 days. The purpose of this notice is to enable the landlord to determine as quickly as reasonably practicable what is going to happen to its lease.

SMITH HANCOCK’S COMMENTS

The main focus of a landlord when faced with a tenant that is subject to an insolvency event is to mitigate the potential for lost rental and/or gain control of the property.

Key points to note:

The landlord’s rights on a tenant’s insolvency to either terminate and/or enter into possession can be subject to:

i) Lease conditions;
ii) Moratorium in the case of Voluntary Administration;
iii) The tenant’s rights to relief against forfeiture.

To mitigate loss following the appointment of an insolvency practitioner the landlord should:

• Ascertain the practitioner’s intentions regarding continued occupation (both short and long term);

• Call on the bank guarantee/security deposit, subject to the lease conditions;

• The landlord should also attend meetings of creditors convened.

If you or your client is faced with the prospect of the failure of a tenant, please do not hesitate to discuss the issue with us to determine the best course of action in the circumstances.

¹ Control day is the day when the Receiver or Receiver & Manager was appointed

² Imo Colorado Group Limited [2011] VSC 552 Para 59