Introduction
The current economic climate has caused
significant pain for various parts of the economy and no less so
for landlords and tenants.
It is important for landlords (and tenants) to understand the
different types of insolvency administrations that may affect
them.
This article will look at how insolvency (such as receivership,
administration or liquidation) of a corporate tenant may affect
landlords.
Payment of rent and other monies payable pursuant to the
lease
A tenant's failure either to pay rent
and outgoings, or when a tenant becomes subject to a form of
insolvency administration, inevitably results in a default under a
lease. These situations give the landlord various rights, including
re-entry and repossession of the premises.
If an administrator is appointed, he will become personally liable
to pay the rent and other monies payable under the lease to the
landlord after five business days from the commencement of the
administration through to its completion, unless
he serves a notice on the landlord before the five business days
period that he does not propose to exercise his rights over the
premises. The administrator's liability to pay the rent and other
monies payable under the lease ceases from the date the notice is
served upon the landlord.
There may be additional monies owing under the lease other than
that for which the administrator is personally liable,
including:
- any monies owing pursuant to the lease before the fifth
business day after the administrator's appointment;
- any monies owing under the lease by the tenant after the
administrator has served the notice; and
- any monies owing under the lease by the tenant after the end of
the administration period.
The tenant will remain liable for these
amounts. However, the landlord's ability to recover such monies
depends on what the tenant's creditors resolve to accept by way of
repayment at a second meeting of creditors. Accordingly, the
landlord may only receive a proportion of monies owing to it (other
than those amounts for which the administrator is personally
liable).
In a receivership or liquidation, the receiver or liquidator may
need to negotiate with the landlord about payment of rent and
length of stay in the premises to preserve the value of the
tenant's business or assets. Where there is no need for
preservation, the landlord can exercise its rights to remove the
tenant from the premises (assuming the tenant has not already
vacated).
A receiver is not bound to pay a landlord for unpaid rent and
outgoings as at the date of appointment. In the case of
liquidation, the landlord will be an unsecured creditor for unpaid
rent and outgoings and will only receive a payment if the
liquidator makes a dividend distribution to creditors.
The effect of voluntary administration on a landlord
Voluntary administration may impact on
a landlord in ways other than those already mentioned. If a
landlord has acted against a tenant to take possession of premises
before the tenant enters voluntary administration, the law does not
restrain the exercise of such right or power. Similarly, the law
does not prevent the exercise of a right to terminate a lease
during administration.
However, during administration, a landlord cannot act to terminate
the lease by recovering possession of the premises or suing for
rent without the consent of the administrator or a court order.
If a deed of company arrangement (DOCA) is
proposed for creditors to vote on at a second creditors' meeting, a
landlord must think carefully about how to vote at that meeting. If
a landlord votes in favour of the DOCA, the landlord will be bound
by its terms and no longer entitled to exercise rights that would
otherwise be available to terminate the lease. If the landlord
considers the 'reconstructed' tenant remains a bad financial risk,
it may be better for the landlord to vote against or abstain from
voting on the DOCA.
The success of a DOCA will often depend on the landlord's attitude
to it. It may be crucial for the administrator to have time to
'rebuild' the tenant's business to sell it to a third party with an
assignment of the lease of the premises.
If a landlord refuses to co-operate, the administrator can seek a
court order to prevent the landlord from taking possession of the
property or otherwise recovering it. The court will only make such
an order if permitting the landlord to act would have a material
adverse effect on achieving the purposes of the DOCA. The court, in
making such an order, must ensure the landlord's interests are
adequately protected and can fashion an order with conditions to
achieve this purpose.1 Such an order is a most
unfortunate result for a landlord.
Legal proceedings against guarantors
A corporate tenant will often be
required to provide personal guarantees by third parties (usually
the directors of the tenant) to secure the performance of the lease
obligations.
However, on the appointment of an administrator, there is
moratorium that lasts until the second meeting of creditors on
taking action against directors (of a corporate tenant) and their
spouses who have provided personal guarantees for the debts of the
company.
While proceedings cannot be issued against directors during the
moratorium, it is important for the landlord to determine its
losses quickly so there is no delay in issuing enforcement action
if necessary at the end of the moratorium.
In determining potential loss, a landlord should consider
mitigation (ie, attempts to re-let the premises), the financial
strength of the guarantor, the prospects of successfully enforcing
the guarantee, the costs that may be incurred in removing the
fit-out, rectification and make good costs, and the rent and
outgoings that would have been payable if the lease had run to
expiry.
Fixtures and fittings
Generally speaking, if a landlord
terminates a lease by re-entry, the tenant is required to remove
its property, including fixtures and fittings, within the timeframe
stipulated in the lease. The tenant is invariably required to
reinstate the premises to the condition it was in before any
fit-out occurred.
Tenants will often vacate leaving fixtures and fitting and other
goods behind. Landlords should exercise caution if they treat the
tenant's property as abandoned and elect to dispose of it. The
primary risk is where the tenant's property is owned by a third
party or, alternatively, is subject to the rights of a financier.
Wrongful disposal may result in a claim for compensation by the
third party or financier.
Should an incoming tenant wish to use the outgoing tenant's
property, it is advisable such negotiations be conducted directly
between the outgoing and incoming tenants. Alternatively, should an
incoming tenant require vacant possession of the premises, the
landlord may elect to remove the outgoing tenant's property and
store it safely at the outgoing tenant's expense at least for a
period until it can safely be said the tenant's property has been
abandoned.
1 For a recent example of the court
making such an order, see Strazdins, in the matter of DNPW Pty Ltd
(subject to DOCA) ACN 107 484 711 v Birch Carroll & Coyle
Limited [2009] FCA 731.
For further information, please
contact:
Wayne Kelcey, Partner
Ph
(direct): + 61 3 9608 2132
Email:
w.kelcey@cornwalls.com.au