Introduction
The liquidation or voluntary administration of either a landlord or a tenant will usually have a significant impact on the other. In this article, we focus on the circumstances involving either the voluntary administration or liquidation of a tenant.
There are obvious benefits of the landlord and the insolvent tenant cooperating, notwithstanding that insolvency events can be distressing to work through, particularly for directors of small businesses.
Cooperation between the parties in a recent matter of ours, the liquidation of an education provider with multiple campuses, had an appreciably positive impact on the overall outcome. The landlord did not take possession of the premises and the lease was able to be quickly assigned to a new tenant.
All section references below are to the Corporations Act 2001.
Voluntary administration of the tenant
- A voluntary administrator, when appointed, assumes control of a company’s assets and affairs and deals with the company’s property during the course of the administration. There are three potential outcomes in the administration of a company. The company’s creditors can resolve that
- the company be wound up and a liquidator appointed; or
- a deed of company arrangement be entered into; or
- the administration comes to an end and the company is returned to the directors.
Possession
- Where a tenant is placed into voluntary administration, the landlord is unable to recover possession of the property that is being used, occupied or in the possession of the company for the period of the administration without the written consent of the administrator or leave of the court (s440B).
- The same restriction applies to commencing or proceeding with court action against the company with respect to the lease. In this way, an interim status quo is preserved while the administrator prepares a report for creditors.
- There are tight statutory timeframes for conduct of an administration and an administrator will be liable for rent from seven days after their appointment if the administrator fails to give notice to the landlord that the company does not propose to exercise rights in relation to the property (s443B(2)).
- While the landlord’s claim for unpaid rent will form part of the Deed of Company Arrangement (DOCA), its ‘right in relation to property’ including taking possession of the premises, is preserved through section 444D. A DOCA may therefore not bind a landlord who voted against it in certain circumstances.
Claims against guarantors
- During the period of the voluntary administration, claims cannot be made or enforced against a director or their spouse or relative (parents, children, brothers and sisters) without leave of the court (s440J). Claims can be brought against other guarantors. If, however, the guarantor has security over the property of the company in administration, they may be prevented by court order from dealing with that security during the administration.
- Unless the DOCA provides otherwise, a landlord may not commence action to recover damages for future rent until the deed is terminated and only where the deed does not provide for the compromise of the debt. If the lease is terminated, the landlord must accept payment under the deed in full satisfaction of the debt. If the lease is not terminated, the landlord can claim ongoing rental if the company remains in occupation, subject to any terms of the deed.
- Where a landlord votes in favour of a DOCA, their debt is compromised by the deed and they are bound by its terms. However, a DOCA does not prevent the landlord from realising or dealing with the assets of the company the subject of the security if they voted against the deed. A landlord can therefore bring enforcement proceedings with respect to a guarantee if they voted against the deed. If, however, the guarantor holds security over the property of the company, the landlord may be prevented by court order from dealing with or releasing that security (s444F).
- Note that a claim under a bank guarantee is enforced against the bank rather than the company. The bank guarantee can consequently be enforced pursuant to its terms, such as requiring an event of default to occur or notices to have been served.
Liquidation of the tenant
Possession
- If the lease provides that the liquidation of a tenant amounts to a default, the landlord can re-enter the premises under certain circumstances which vary from state to state and are specific as to whether the property is commercial, residential or retail premises.
- Note that section 129 of the Conveyancing Act 1919 NSW restricts the right of re-entry by a landlord upon breach of the lease until notice has been given and the lessee fails within a reasonable time thereafter to remedy the breach. In the event that the requirements of the legislation are not met, the landlord may need to pay reasonable compensation to the satisfaction of the lessor for the breach. They may also be liable for trespass.
- If after receiving the relevant notices, a tenant refuses to leave or remove their property from the premises, the landlord must apply to the court under section 471B for assistance. This is because while the insolvent tenant is being wound up, the landlord is unable to commence or continue with any court proceedings in respect of the lease or enforce any process regarding the lease without leave of the court. Such a stay of proceedings includes action to recover possession of the premises.
Disclaimer
- Where a landlord has not terminated the lease but the liquidator no longer wishes for the company to occupy the leased premises, the liquidator can take action to disclaim the lease as onerous (s568). The landlord then becomes an unsecured creditor of the company and the company’s liability and interests in the property are extinguished (s568D(1)).
- The lease can be disclaimed even when the liquidator has attempted to assign the lease or exercised rights in relation to the property.
Assignment of the lease
- A lease can be assigned through the preparation of a Deed of Consent to Assignment of Lease and Assignment to which the landlord, the liquidator and the incoming tenant are all parties.
- The consent of the landlord is required. It is common for the landlord to require the incoming tenant to produce a new rental bond and sign a Transfer of Lease before providing such consent. The Transfer then needs to be registered with the relevant state authority and stamp duty paid where necessary. It should be expected that the landlord would also oblige the new tenant to provide a personal guarantee.
The landlord’s proof of debt
- A landlord ranks alongside other unsecured creditors in the winding up process. Section 553 provides a very broad definition of a provable debt which includes arrears, future rent and damages. Note that a landlord’s claim for future rent is subject to the Corporations Regulations 1990 (Cth). Regulation 5.6.43 allows a landlord to submit a proof of debt for rent that accrues in the future provided that the lease agreement was entered into prior to the date of liquidation.
- Since the landlord has a duty at law to mitigate their loss, the usual assessment of damages consists of the value of the rental payments for the duration of the lease, minus the amounts paid by a subsequent tenant, plus the expenses incurred in locating that replacement tenant.
Claims against guarantors and other security
- The landlord’s claim against a security deposit or bank guarantee is not usually affected by the liquidation of the tenant. This would include a landlord’s claim against a guarantor for damages in relation to future rent. While the company and its property are released from liability to the landlord pursuant to section 568D, that section does not apply to guarantors.
Conclusion
The voluntary administration or liquidation of a tenant (or indeed a landlord) raises many complex issues, not all of which are covered in this brief article. It is important to seek legal advice to ensure that all of your rights are preserved and protected under such circumstances.
