Australia: Safe harbour legislation impacts right to terminate leases for insolvency events

Last Updated: 2 December 2017
Article by Masi Zaki
Services: Corporate & Commercial, Real Estate & Construction, Restructuring & Insolvency
Industry Focus: Financial Services, Real Estate & Construction

What you need to know

  • Australia's new safe harbour legislation includes important reforms relating to 'ipso facto' clauses that allow one party to a contract to terminate or modify the agreement based on the other party entering into an insolvency event.
  • When these reforms come into effect in 2018, there will be major restrictions on the enforceability of ipso facto clauses.
  • Landlords and tenants of commercial and retail premises are among those who will need to consider the way their future lease agreements, and their future commercial dealings, will be impacted by the moratorium that will soon apply to the enforcement of termination rights based on insolvency.

The newly enacted Treasury Laws Amendment (2017 Enterprise Incentives No.2) Act (Cth) 2017 (Safe Harbour Legislation) is primarily concerned with giving company directors breathing space in circumstances where a restructure is being pursued. In particular, directors who meet the appropriate safe harbour criteria can benefit from protection against insolvent trading liability while they seek to work through the company's financial difficulties and implement a restructure plan.

Consistent with the overarching objective of enabling more businesses to turn themselves around, the Safe Harbour Legislation will soon protect contractual parties by restricting the enforcement of 'ipso facto' clauses, which allow one party to terminate or modify a contract based on the counterparty experiencing an insolvency event. When it comes into effect next year this change is likely to significantly impact numerous organisations, given that ipso facto clauses are common in a range of commercial contracts such as supplier agreements and service contracts. Ipso facto clauses will also be familiar to landlords and tenants, as they frequently appear in commercial and retail leases (where they usually provide the landlord with rights to terminate a lease on the basis of the tenant's insolvency event).

It is important for landlords and tenants to understand how the changes to the enforcement of ipso facto clauses may impact their general commercial dealings and, more specifically, their rights if and when tenants (or landlords) experience insolvency events in the future.

Recap on ipso facto clauses

The general argument in favour of ipso facto clauses is that they protect the rights of potentially significant and vulnerable creditors in circumstances where their counterparties can no longer perform their contractual obligations and the risks to the creditors would increase if an insolvency were to ensue. For example, if a landlord's major tenant were to experience an insolvency event, an ipso facto clause in the lease would expressly entitle the landlord to terminate and therefore avoid the risks that might arise from the lease continuing with the tenant in a precarious position.

From a restructuring perspective, however, the argument against ipso facto clauses is primarily based on the potentially irreparable damage that can be done to the value of a business. That damage arises from a contract (or lease) being terminated on the basis of an insolvency event and the flow-on effect that such termination would have on the ability of external administrators to maintain company value and realise assets (including the relevant business as a going concern) in a distressed scenario.

The automatic stay

The Safe Harbour Legislation seeks to address these issues by mandating an automatic stay or 'pause' on a party's right to enforce a provision to terminate or amend a contract solely because:

  • the counterparty enters administration1
  • the counterparty has a managing controller appointed over all or substantially all of its assets2
  • the company is undertaking a compromise or arrangement for the purpose of avoiding liquidation3.

In any of these scenarios, the stay would only operate whilst the formal restructure process is ongoing and would automatically cease when the company is wound up by resolution or order of the court.

The ipso facto moratorium under the Safe Harbour Legislation will only apply to rights under contracts or leases entered into after 1 July, 2018, meaning that landlords and tenants entering into leases between now and then will still be able to include and enforce ipso facto clauses in those leases.

Even when the stay does come into operation next year, a landlord could potentially still enforce its right to terminate a lease on the basis of an ipso facto clause if:

  • it obtains the prior written consent of the relevant insolvency practitioner, or
  • the termination is pursuant to an order of the court

although both of these avenues would likely take some effort for the landlord to pursue.

Further, a landlord will also maintain its right to terminate or amend a lease on the basis of other monetary and non-monetary defaults. However, any attempt by a landlord to rely on historical default, particularly in circumstances where they might have agreed to forbear, might give rise to a dispute and court intervention.

Practical considerations for landlords and tenants

Although the stay on the enforcement of ipso facto clauses does not have immediate or retrospective application, landlords and tenants should consider the commercial and legal impact of the automatic stay on any new agreements entered into after 1 July 2018.

In particular, the following practical considerations should be borne in mind:

  • The ipso facto moratorium introduced under the Safe Harbour Legislation does not alter any existing rights and entitlements under the Corporations Act 2001 (Cth) (Corporations Act) or related legislation concerning retail and commercial leases. As such, the restrictions on the exercise of third party property rights under section 440B of the Corporations Act, for example, remain unaffected. The stay on the enforcement of ipso facto clauses introduced by the Safe Harbour Legislation will simply add an extra layer of protection for tenants experiencing an insolvency event.
  • Landlords should review their leases to ensure their rights to terminate on the basis of non-monetary and non-ipso facto clauses are clear and enforceable.
  • As currently drafted the Safe Harbour Legislation will restrict enforcement of ipso facto clauses against the company which goes into administration. Arguably this still allows scope for the landlord to exercise rights against third parties who have provided guarantees (e.g. bank guarantees) or other surety for the company, provided those rights are sufficiently provided for in the drafting of the lease conditions. Certain guarantors (directors and some of their relatives) will still be protected during the period of voluntary administration under existing legislation, namely section 441J of the Corporations Act.
  • If leases continue to contain ipso facto clauses after 1 July 2018 and a landlord was to inadvertently or mistakenly issue a termination notice on the basis of an ipso facto clause, it may be open for the tenant to accept such a notice as repudiation of the contract and sue for damages. Landlords should therefore take care in determining when and on what basis termination notices should be issued, particularly in light of the fact that the moratorium on enforcing ipso facto clauses is intended to protect the enterprise value of the party experiencing the insolvency event (in other words, the tenant). The potential consequences for wrongful default or termination notices (including ones issued inadvertently or mistakenly) may be significant once the new moratorium is in force.
  • Some landlords may wish to consider implementing measures to monitor key client performance against leases in an effort to not to be caught off guard by the tenant's announcement of a formal restructure. Landlords might monitor counterparties by scrutinising their financial health with reference to timely performance against contractual monetary and non-monetary obligations, and by:
    • conducting periodic tenant audits
    • obtaining trade reference checks
    • conducting periodic searches of the Personal Property Securities Register
    • obtaining credit ratings reports or third party financial reports.
  • For landlords, active engagement with and monitoring of tenants will also be important in the context of historical defaults and landlords' previous decisions to forebear on enforcement. If, for instance, a landlord were to:
    • happily grant a forbearance only for a formal restructure to be announced at a later point in time, and then
    • cease its forbearance and terminate or modify a lease by relying on the early monetary or non-monetary default (as opposed to the insolvency event)
    • it may be possible for the tenant (acting by its external administrators) to argue that the termination was wrongful in the circumstances and claim damages.

  • The Safe Harbour Legislation actively encourages directors to pursue informal restructures. As such, landlords will have to be more vigilant in their dealings with directors who are seeking safe harbour protection and who might flag the potential risk of future formal restructures which would trigger the application of the automatic stay.

What's next

The second half of 2018 will probably bring with it a flurry of court activity and decisions which will shed more light on how the Safe Harbour Legislation will be interpreted and applied in a practice. Until then, it is important for landlords to take pro-active steps in their management and monitoring of counterparty performance, and appropriately review and amend the terms on which they enter into new lease agreements post 1 July 2018.


1 Corporations Act 2001 (Cth) s 415D.

2 Corporations Act 2001 (Cth) s 434J.

3 Corporations Act 2001 (Cth) s 451E.

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Masi Zaki
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions