One of the common parties that insolvency practitioners have to deal with is landlords. Many company liquidations and business bankruptcies involve a leased premises and the insolvency practitioner will have to deal with that tenancy arrangement while taking into account their rights and the rights of the landlord.
One recent dealing with a landlord and his ‘advisors’ prompted us to write this article. We are voluntary administrators and were on the verge of obtaining an Order to gain access to the premises to remove the company’s assets when common sense prevailed. Unfortunately for the landlord, because he had locked us out of the premises we did not have ‘possession’ and were not liable to pay him rent for that period.
What type of administration is involved will determine the immediate rights between the parties. The terms of the tenancy will determine what claims the landlord has against the insolvent tenant and the provisions of the Corporations Act or Bankruptcy Act will determine the rights between the landlord and the practitioner.
But the end result of most administrations will either be that:
(a) the tenant will vacate the premises and the landlord will lodge a claim in the insolvent estate; or
(b) its financial affairs will be rectified through some formal arrangement and the tenancy will continue.
The most common issues are that arise between the parties are (i) who is liable to pay ongoing rent; (ii) the landlord’s right to re-enter; (iii) the landlord’s provable debt; (iv) disclaiming the lease; and (v) any liabilities of the practitioner incurred during the period.
The first point is that the lease will generally survive the insolvency of a tenant. Regardless of whether the tenant is a company or an individual, the insolvent tenant will be liable under that contract and the estate of the tenant will deal with that liability as a provable debt. The terms of the contract may include some provision for dealing with insolvency, usually an automatic breach upon liquidation or bankruptcy. If not, the rights of the landlord are firstly based in a breach of the contract for unpaid rent.
As the lease is with the insolvent tenant and not the practitioner, the practitioner will only be liable for rent in limited circumstances.
An insolvent tenant will remain liable for rent after the appointment, usually for the remainder of the lease term. Any liability to pay the rent during this period rests with the insolvent tenant albeit that it will probably not be paid. The landlord can prove in the estate for post appointment rent as well as unpaid current rent based on the original contract.
However under the Corporations Act, a voluntary administrator (section 443B) and a receiver (section 419A) will be liable for the rent where the insolvent tenant “uses, occupies or is in possession” of the leased premises. This liability only starts seven days after the appointment and ends when the practitioner:
(a) gives notice that the tenant is vacating the premises;
(b) vacates the premises – whether notice is given or not; or
(c) ceases to be the voluntary administrator or receiver – whether the tenant continues to occupy the premises thereafter or not.
The Corporations Act contains these provisions to force the practitioner to decide whether they need to occupy the premises or can hand it back to the landlord. The seven day rent-free period gives the practitioners the time to make that decision and, if needed, to vacate of the premises.
In both of these cases the company is not being wound up. The administration is a control period to allow the company to form and propose a deed of company arrangement to creditors, meaning that the administration of the company may come to an end. The receivership is an appointment over assets to benefit a secured creditor and the debtor may survive that process.
Rights to the premises
The insolvent entity remains the tenant and the practitioner (acting through the entity) can remain in possession of the premises as long as the normal steps of eviction have not occurred.
The Corporations Act provides that voluntary administrators can retain possession of the premises during the period of the administration (section 440C) regardless of eviction proceedings, but the administrator will become liable for the rent for that period (section 443B).
Receivers do not have the power to remain in possession if the landlord wants them out, however the landlord will have to follow the normal eviction process. They usually cannot demand the immediate removal of the tenant.
The landlord’s claim
The landlord can lodge a proof in any liquidation, administration, deed of company arrangement, agreement under Part X or bankruptcy of a tenant. They are entitled to prove for any rent outstanding at the time of the appointment and for any rent that becomes due for payment after the appointment.
Future rental that would have been paid under the lease is a provable debt, however the amount may have to be discounted at a rate which is prescribed by the various Regulations and the landlord will have to mitigate their loss by attempting to find a new tenant. They will usually be keen to do so as they will get more rent from a tenant than from a dividend.
Disclaiming a lease
Disclaiming a lease is different from the notices given by administrators and receivers when they vacate a premises.
Disclaiming a lease terminates the lease. This allows the landlord to re-enter possession (if they have not already done so) and re-tenant the premises. It also removes the registration of the lease from the title of the property.
Liquidators (section 568) and Trustees in Bankruptcy (section 133) have powers to disclaim lease contracts. This does not affect the rights of the landlord to prove for any amount is the estate, but allows the landlord to deal freely with the property.