Now that the state and territory tenancy relief measures introduced in response to COVID-19 have ended, many commercial landlords may be starting to see an increase in tenants defaulting on their leases due to financial distress, if not becoming subject to formal insolvency appointments.
This is particularly likely in the retail and hospitality sectors, which suffered significantly due to lockdowns, trading restrictions and border closures, and also the office (or business services) sector.
ASIC’s insolvency statistics report for the quarter ending March 2021 (Series 1A) indicates that the greatest number of external administration appointments during that period were made in the accommodation and food services, business and personal services and retail trade industries.
Appointments are likely to increase during 2021, particularly as the ATO resumes pursuing and enforcing debt recovery action.
Often a landlord receives no warning prior to receiving notice of an appointment and needs to make quick decisions to protect its position to maximum advantage.
So it’s timely for a refresher on the options and practical steps available to landlords and how practitioners can best assist to protect a landlord’s rights and interests when a tenant enters a formal insolvency process.
Practical Law’s Christine Gray, Head of Commercial Real Estate, and Laura Hawes Head of Insolvency & Restructuring, have shared a complimentary checklist for legal practitioners dealing with this specific scenario. For immediate access to it, complete the form on the page.
The practice area experts also talk through some of the common issues that can arise and how to deal with them.
Practice area expert interview
Q: Laura, can a landlord terminate a lease and recover possession of the premises on appointment of an external administrator?
A: Laura: It depends on the type of external administration. If a receiver alone is appointed to the tenant, the landlord can terminate and take possession of the premises in accordance with the terms of the lease provided the ground for termination isn’t the fact of the receivership or a related reason (which would contravene the ipso facto stay provisions). For example, termination based on non-payment of rent would be permitted.
If a voluntary administrator is appointed, the landlord can terminate for a reason not stayed by the ipso facto provisions but should normally wait and refrain from doing so because in most cases it will not be able to recover possession of the premises during the voluntary administration period without the administrator’s written consent or court’s leave. The position is similar where a restructuring practitioner is appointed under the small business restructuring regime. However, if the outcome of the voluntary administration process is the company’s entry into a Deed of company arrangement, the landlord may be able to recover possession at that time (provided that it did not vote in favour of and is not bound by the DOCA). Sometimes, continuation or assignment of the lease is a term of the DOCA.
If a liquidator is appointed, this will usually constitute an event of default and the landlord will be entitled to terminate the lease in accordance with its terms (the ipso facto stay provisions do not apply provided the liquidation wasn’t preceded by a voluntary administration). Otherwise, the liquidator has the option of disclaiming the lease as an onerous contract by written notice to the landlord, which has the effect of terminating it. If the lease is terminated (either by the landlord or the liquidator by disclaimer), the landlord can usually re-enter and recover possession of the premises in accordance with the terms of the lease and any applicable state or territory legislation.
“In all cases, a landlord should engage with the external administrator as soon as possible to ascertain his or her intentions as to whether the lease is likely to be kept on foot or assigned. This is often commercially a better outcome for the landlord than termination and having to find a replacement tenant.”
– Laura Hawes, Head of Dispute Resolution, Practical Law
Q: Can a landlord enforce a bank guarantee for outstanding rent and other payments due under the lease when an external administrator is appointed to a tenant?
A: Laura: It again depends on the type of external administration, but generally the answer is yes in all cases.
Where a receiver, administrator or restructuring practitioner is appointed, the landlord should take care to ensure that the ground for drawing down on the bank guarantee is not the fact of the appointment itself (or a related reason), as this will risk contravening the ipso facto stay provisions. Where a liquidator or deed administrator is appointed, there is no such restriction (provided that any liquidation was not preceded by a voluntary administration).
Q: So can a landlord take action to recover outstanding rent while a tenant is under external administration?
A: Laura: Where the tenant is in receivership alone (and not also voluntary administration or liquidation, which can commonly occur), the landlord can commence proceedings against the company to recover rent and other amounts owing under the lease at any time.
Where the tenant is in voluntary administration, liquidation or subject to a small business restructuring process, the landlord cannot begin or continue court proceedings to recover rent or other amounts owing under the lease without the external administrator’s written consent or leave of the court. If the tenant is subject to a DOCA and the landlord is bound by the DOCA (because it voted in favour of it), the landlord also cannot begin or continue a proceeding against the company to recover rent or other amounts outstanding under the lease until the DOCA terminates without the court’s leave.
Q: What are the legal consequences if the lease is disclaimed by a liquidator or trustee in bankruptcy?
A: Christine: Unless leased premises are necessary to carry on the tenant’s business pending its sale, a liquidator or trustees in bankruptcy will usually disclaim the lease at which point the lease is terminated and the landlord is left to claim as a creditor for its losses in relation to the lease and claim against any corporate or personal guarantees (although likely to be of little benefit in most cases).
The landlord must also mitigate its losses and try to find a new tenant for the premises. Of course, where a lease is disclaimed during a period of economic uncertainty, finding a new tenant can prove difficult.
Unfortunately, that’s not the end of the matter for the landlord. In either case the landlord must then make application to the relevant land registry to have the lease removed from the title to its land, which becomes more involved where the lease has been mortgaged or a sublease has been granted.
Q: Can the landlord deal with abandoned goods under the terms of the lease during the tenant’s external administration?
A: Christine: The terms of the lease will almost certainly give the landlord the right to deal with the tenant’s abandoned goods in some manner once the lease is terminated, but when and how the landlord exercises that right will depend on:
- The terms of the lease and, in particular, the abandoned goods clause, and whether that clause gives rise to a security interest that is required to be and is properly registered on the Personal Property Securities Register (PPSR).
- Whether the goods effectively belong to a third party (for example, under the terms of a hire purchase agreement) who has a valid security interest in respect of those goods that is properly registered on the PPSR.
- Any restrictions or permissions required in relation to the relevant form of external administration.
Where a receiver has been appointed and the goods fall within the receiver’s control under section 420 of the CA 2001, they will be subject to the receiver’s security and the landlord will need to seek the receiver’s consent before dealing with them. Even if the goods technically fall within the receiver’s control, the receiver may not consider it commercially or otherwise worthwhile to seek to sell them and may consent to the landlord disposing of or otherwise dealing with them.
“If the tenant has gone into voluntary administration, the landlord must first obtain the administrator’s written consent, otherwise any dealings with the abandoned goods will be void. The landlord should take the same approach where the tenant is subject to a small business restructuring process.”
– Christine Gray, Head of Commercial Real Estate, Practical Law
The situation can be more complicated where a DOCA is in place. The landlord must first establish that dealing with the abandoned goods is not precluded by the terms of the DOCA (or any court order). If it clears that hurdle the landlord will also need to establish whether or not the goods otherwise fall within the deed administrator’s control as properly constituting the company’s property. A prudent landlord should normally seek the deed administrator’s written consent before seeking to deal with the goods.
Finally, where a liquidator is appointed and the lease is disclaimed, the abandoned goods may, depending on the terms of the lease, remain the property of the company and subject to the liquidator’s control (Bellaire Pty Ltd v Roselink Enterprises Pty Ltd (No 2) [2020] WASC 390 provides an example of when this can happen) and the landlord will need the liquidator’s permission to deal with these goods.
Practical Law resources
Practical Law’s Insolvency & Restructuring and Commercial Real Estate modules have provided Legal Insight with a complimentary checklist to share with readers. This guide is intended to assist landlords and their advisors (whether property lawyers or insolvency practitioners) to quickly navigate common issues that arise when a corporate tenant enters some form of external administration and is available just by downloading it here on this page.
Practical Law subscribers can access more information on how landlords can protect their rights and interests when a corporate tenant enters external administration (and in relation to external administration processes generally) in the following practice notes on Practical Law Australia:
- Practice note, A guide for landlords: navigating the external administration of a corporate tenant.
- Practice note, Surrenders of lease.
- Practice note, PPSA: Landlords and property leases: Right to sell abandoned goods.
