Australia: I´m Sorry Landlord, But I Don´t Think Your Tenant Is Going To Pull Through......

Whilst everyone from heads of state to taxi drivers can (and usually will) proffer an opinion as to whether the current economic climate meets whatever technical criteria the economists consider necessary to be labelled a "recession", these semantics matter little to the growing number of landlords now facing the reality of dealing with tenants who enter into some form of insolvency administration.

Few were surprised when the debt-laden behemoth, ABC Learning Centres Limited, finally succumbed to its long bout of financial ill-health in the early days of what threatens to be a long and bitter winter of significant discontent.

On 6 November 2008, thirty-nine companies within the ABC Group appointed partners of Ferrier Hodgson to be their voluntary administrators. Immediately after that, partners of McGrath Nicol were appointed to be the receivers and managers of the assets of these companies by a syndicate of secured creditors.

The ABC Group scenario is far from unique – the appointment of administrators will often prompt the appointment of receivers and vice versa. Nonetheless, many challenges arise for landlords in having to deal with tenants who are under the control of both administrators and receivers and ABC represents an instructive case study.

As a general proposition:

  • Administrators are looking to best promote the position of all unsecured creditors, with a view to getting them a better return than they would receive if the company were to go into liquidation; and
  • Receivers are interested in promoting the interests of the secured creditor who appointed them, with a view to producing the best possible return for it.

Whilst the legal principles that come into play are quite technical, the following represents a rough guide for landlords as to where they stand in such a scenario. The ABC Group receivership/administration shall be used as an example but the principles hold true for any similar factual situation.

So far as the ABC Group is concerned:

  1. Landlords should note that it is the Receivers, not the Administrators, who are continuing to trade the childcare centres. They have adopted a "business as usual" approach for the moment.
  2. The Receivers had a period of seven days within which they were able to send notices to landlords if they did not propose to exercise rights in relation to any particular premises that were occupied by an ABC company. So far as we know, no such notices have been sent and the Receivers have continued to trade on all of the childcare centres within the ABC Group.
  3. Absent such a notice, the Receivers had the benefit of a seven day statutory period of grace from the date of their appointment, in respect of which they are not liable for rent or other sums payable to landlords. Hence, landlords have no right to look to the Receivers for rent and other sums payable up to 13 November 2008.
  4. From 14 November 2008, the Receivers are personally liable for the ongoing rent and other amounts payable to landlords so long as they continue in possession of the premises. Landlords should direct their invoices to Chris Honey, John Cronin and Murray Smith of McGrath Nicol.
  5. The Receivers are entitled to apply to the Court for an order excusing them from their personal liability for rent and other sums. Such relief is difficult to obtain and there is no indication that the Receivers are contemplating such an application. So far as we know, landlords will continue to receive rent and other sums due under their leases from 14 November 2008 in the usual way.
  6. Landlords cannot look to the Receivers for payment of any arrears of rent or other sums due pursuant to their leases prior to 6 November 2008. Unless their leases otherwise provide, landlords are unsecured creditors for such debts and, therefore, must lodge proofs of debt with a view to receiving a "cents in the dollar" dividend if and when one is declared. Landlords ought to deal with the Administrators, rather than the Receivers, in respect of these claims. Ultimately, the Administrators will call a meeting at which creditors will decide the future of the ABC companies. Creditors will vote upon:
  • Whether they ought to accept any Deed (or Deeds) of Company Arrangement that may be proposed by any persons. A Deed of Company Arrangement is a "master deal" designed to provide a better return for unsecured creditors than they would receive in liquidation; or
  • Whether the ABC companies ought to go into liquidation.
  1. For the duration of the administration of the ABC companies, most landlords are subject to a general moratorium which precludes them from exercising their rights or powers under their leases. That is, they are prevented by statute from exercising any rights or powers in relation to any premises occupied by any ABC company.
  2. This general moratorium continues until the administration comes to an end. Generally, that will occur if and when:
  • The unsecured creditors vote for liquidation (if, indeed, this is what they do); or
  • The relevant parties sign a Deed of Company Arrangement (again, if indeed this is what occurs).
  1. Generally, an administration will last for five or six weeks. However, the administration of the ABC companies is expected to last longer than this as the Administrators are, quite understandably, contemplating making an application to the Court for an extension of time. If such an application is successful, as we believe would be the case, the general moratorium would be extended accordingly.
  2. Notwithstanding the general moratorium, landlords are entitled to serve Default Notices or Notices to Quit. However, landlords cannot act upon such notices until the moratorium expires.
  3. The general moratorium does not apply to a landlord who, before the beginning of the administration, had entered into possession, assumed control or exercised any other power in relation to property used or occupied by, or in the possession of, an ABC company with the purpose of enforcing its rights as lessor. Generally, landlords in that position are entitled to exercise their rights with impunity. Nonetheless, it is possible for the Administrators, when confronted by such a landlord, to apply to the Court for an order limiting or prohibiting the landlord from exercising its powers in relation to its premises. On such an application, the Court will restrain the landlord from exercising its rights only if satisfied that what the Administrators propose to do during the administration will adequately protect the interest of the landlord.
  4. Landlords who are subject to the general moratorium, but dissatisfied with it, may write to the Administrators seeking their written consent to recover possession of their premises. Such a request should also be made to the Receivers, given that they are presently trading on the childcare centres. If the Receivers and the Administrators so consent, a landlord may take possession of its premises.
  5. Absent such consent, a landlord is entitled to make an application to the Court for recovery of possession of its premises. On such an application, the landlord would seek to convince the Court that the financial or other loss and detriment that is being sustained by it as a consequence of the moratorium is greater than any benefit or advantage that creditors may derive. We apprehend that any such application would be difficult for a landlord to win, and likely to be opposed by both the Receivers and the Administrators. Nonetheless, if any landlord is minded to consider any such application, it would need to be analysed with regard to its own particular facts.
  6. After the administration comes to an end, and the moratorium ceases to have effect, landlords are generally entitled to exercise their rights and powers in the usual way. However, if creditors vote in favour of a Deed of Company Arrangement whose operation would be adversely affected in a material way if landlords were to recover possession of their premises, the Deed Administrators may make an application to the Court restraining landlords from exercising their powers and rights, so that the terms of the Deed can be carried into effect. The Court will only make such an order if satisfied that the interests of the landlords will be adequately protected.

The application of these principles to the receivership and administration of companies within the ABC Group is unlikely to be straightforward. In any event, insolvency practitioners are becoming busier by the day and, inevitably, a growing number of landlords are finding themselves in the invidious position of having their tenant fall into administration and receivership. We apprehend that many retail tenants are holding on grimly to obtain the benefit of Christmas and January trading, after which cash flow difficulties may result in the corporate undertakers being summoned.

Landlords who find themselves in such a position ought to seek specialist advice that takes into account their own unique circumstances. Doubtless many a taxi driver will be more than willing to put forward a considered view!

© HopgoodGanim Lawyers

Australia's Best Value Professional Services Firm - 2005 and 2006 BRW-St.George Client Choice Awards

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Darrell Jardine
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