When a retail tenant enters voluntary administration, it creates a complex situation for landlords because the landlord's usual rights are restricted. Separately from the various tenant protections contained in retail leases legislation, the Corporations Act 2001 (Cth) the Act, prescribes how administrations are conducted, which places limits on landlords' rights.
What is voluntary administration?
Administration is a process where a company which is, or is likely to become, insolvent appoints an insolvency practitioner - known as an administrator - to take full control of its affairs. It allows the company's directors or third parties time to find a way to save the business from being liquidated.
Once appointed, the administrator is responsible for reporting to the company's creditors, who will then determine whether:
- the administration should end, and control of the company returns to the directors; or
- a Deed of Company Arrangement (DOCA) if proposed, is to be approved, through which the company will pay all or some of its debts and possibly continue trading; or
- the company should be placed into liquidation.
During an administration, the administrator has control of the company's business, property and affairs. They may continue operating the business, manage the property, terminate or dispose of the company's assets (including property), and carry out any duties or functions the company and its directors could have exercised.
Many retail and commercial leases contain a clause which states that a default event occurs if a tenant is placed into administration or liquidation, thereby allowing the landlord to terminate the lease. However, it is important to note that despite what the lease might say, the appointment of administrators to a tenant does not give the landlord an immediate right to terminate the lease, nor does the administrators' failure to operate the business from the leased premises give rise to such a right.
Under section 440B of the Act, a landlord is unable to re-enter the leased premises during the administration of a company, unless the administrator has consented in writing or the landlord obtains leave of the Court.
Who pays the rent while the administrators occupy the premises?
Under section 443B(3) of the Act, an administrator may issue a notice to the landlord within five business days of their appointment, stating that the company does not intend to exercise rights in relation to the leased premises. If such a notice is given, the administrator is not personally liable for rent and the landlord may take possession of the premises. The company may still occupy the premises (eg. leaving goods in situ) during the administration without incurring liability.
If the administrator chooses to continue operating the business from the leased premises, section 443B(2) of the Act provides that they are personally liable for rent and other amounts payable under the lease for the period which begins more than five business days after the administration began and while they continue to occupy the premises and the administration continues.
The administrators may apply to the Court to extend the period in which they will not be personally liable to pay rent (known as the 'standstill period'), even if the business continues to trade. The Federal Court has decided that while the administrator is excused from being personally liable, the rent and outgoings which accrue during a standstill period will be payable as a priority expense in the administration or subsequent liquidation of the insolvent tenant. This applies irrespective of whether the standstill period is extended.
Creditors' meetings
Two creditors' meetings must be held during an administration. The first meeting occurs within eight business days after the commencement of the administration. Its purpose is to decide whether to appoint a committee of inspection and whether the administrator should be replaced. The second meeting occurs after the administrator has concluded their investigation into the company's affairs, which generally happens five to six weeks after the administrator's appointment, sometimes longer if needed.
A report to creditors must be provided before the second meeting, together with the administrator's statement on which option they believe is in the best interests of creditors. Creditors will then be given the opportunity to vote on the company's future.
Key considerations for landlords
When dealing with tenants in administration, landlords should keep the following considerations in mind:
- voting is power: Decisions in administrations are made based on the majority vote of creditors in both value and number. Finding a way to influence the creditors' vote is a means for a landlord (as a creditor) to achieve the best outcome for itself. Ensure proofs of debt and proxies are completed as a priority as soon as the administration begins. Understand who your fellow creditors are and their interests to strengthen your position
- proofs of debt: Landlords, as creditors, often fail to understand the full extent of their possible claim. Be sure to complete and file proofs of debt with a full present and contingent claim - in other words, a landlord may submit a claim for both rent arrears and future loss and damage
- proxies: Unless a creditor is represented by its directors at creditors' meetings, proxies must be arranged. Preparation of proxies should commence as early as possible during the administration. Where voting results are tight, or when a harsh DOCA (Deed of Company Arrangement) is proposed, pulling apart invalid proxies can be a crucial strategy to protect a landlord's interest. Ensure your proxies are solid to protect your interests in case your vote is challenged
- committee of creditors: The administration of a large retailer could have a significant impact on your business. Being on a committee (formed at the first meeting) may give you the earliest opportunity to understand what the possible outcomes of the administration may be. You may also be able to gather information, ask questions and influence the course of the administration
- avoid the 'no future rent' trap: If a tenant intends to trade on through a DOCA, ensure your rights, as a landlord, to obtain future rent are preserved. Ensuring your participating creditor status is limited to pre-existing debt (arrears) under a DOCA providing for a trade-on is essential. Otherwise, you may inadvertently release the tenant from its obligations to pay future rent. The DOCA proposal should clearly state that future claims under leases that remain ongoing are not compromised
- notice of intention not to exercise property rights is not a disclaimer: If the administrator notifies you that they do not intend to continue operating from the premises, the lease is not automatically terminated - the notice is not a disclaimer. If you, as the landlord, need to access the premises and wish to terminate the lease, you must serve the requisite notice. An immediate termination by repossession should only occur with the administrator's consent to access the premises.
If you have any questions regarding this article, please contact a member of our team below.
- This article was originally published in Shopping Centre News magazine.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.