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Landlord Rights

This Fact Sheet deals with the rights of landlords and insolvency practitioners when a tenant becomes insolvent.

The type of insolvency administration will affect the immediate rights between the parties, and the terms of the tenancy will determine what claims the landlord has against the insolvent tenant.

The end result of most administrations will either be that: (a) the tenant will leave the premises; or (b) its financial affairs will be rectified through some formal arrangement and the tenancy will continue. Either way, it is likely that some outstanding rental will remain unpaid.

What are the common issues?

The most common issues are:

(i) who is liable for the rent
(ii) the landlord's right to re-enter the premises
(iii) what will be a provable debt
(iv) disclaiming the lease
(v) any liabilities of the practitioner

What happens to a lease when a tenant is insolvent?

A lease is a contract that survives the initial insolvency of a tenant. Regardless of whether the tenant is a company or an individual, the 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 also 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.

Will an insolvency practitioner be liable to pay rent?

The lease contract is with the tenant, not the insolvency practitioner. An insolvency practitioner will only be liable in limited circumstances.

An insolvent tenant will continue to accrue rent after the appointment of a practitioner, at least until the tenant vacates the premises but usually for the remainder of the lease period. Any liability to pay the rent during this period rests with the insolvent tenant. The landlord can prove in the estate for post appointment rent as a claim based on the original contract.

The practitioner is not a party to the lease and does not become personally liable for rent accrued during the period that the tenant continues to occupy the property, unless the Act specifically provides for that liability.

What types of insolvency practitioners may be liable to pay rent?

1. A voluntary administrator under section 443B; or
2. A receiver under section 419A.

These practitioners will be liable for the rent accrued where the tenant under their control "uses, occupies or is in possession" of the leased premises, starting from seven days after the appointment. The liability ends when the they:

(a) give notice that the company is vacating the premises;
(b) they actually vacate the premises; or
(c) the company ceases to be in voluntary administration or receivership - whether the tenant continues to occupy the premises or not.

Sometimes the practitioners will vacate the premises but another party will remain, usually negotiating new arrangements with the landlord. The liability of the practitioner ends when the practitioner vacates the premises. Notice will usually be served on the landlord at that time and the landlord can deal with the other party as it sees fit.

Why are administrators and receivers liable for rent?

The Corporations Act specifically makes voluntary administrators and receivers personally liable for rental after the seven day period 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 cases the company is not being wound up. The administration is a control period to allow the company to form and proposal a deed of company arrangement to creditors and the administration of the company may end. The receivership is purely an appointment to benefit a secured creditor and the landlord should not have to contribute to that process.

Without these provisions, practitioners would not be personally liable for rental and could continue to occupy the premises indefinitely. This would be unfair to landlords.

Are practitioners liable for any breach of the lease?

No. The appointment of a practitioner usually breeches the terms of a lease, and by this time the lease has usually been breached for nonpayment of rent. The practitioner will not be liable for this or any other breech of the lease. This includes costs for removal of rubbish or making good a fit-out etc. The contractual arrangement is between the landlord and the tenant, not the practitioner.

Can a practitioner remain in 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), 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, legally the landlord will have to follow the normal eviction process. They usually cannot demand the immediate removal of the tenant.

Even though the tenant is insolvency, and subject to the above, the landlord can still rely on the terms of the lease to evict the tenant.

What do landlords have to do to get possession?

In most cases the landlord will have to take the steps under the lease to evict a tenant. These will be of no effect if a voluntary administrator invokes the powers under section 440C.

The landlord should consult a solicitor about the preparation and service of appropriate notices to ensure there are no problems with obtaining possession. In these cases, the notice should be directed to the practitioner, but be in the name of the tenant.

What if I need to go to Court to get possession?

The problem with a corporate tenant being placed into administration or liquidation is that all current proceedings against the company are stayed and no new ones can be commenced. That is, a landlord will have to seek leave of the Court in order to obtain the necessary Order forcing the tenant to vacate the premises. In normal circumstances, the court will generally grant leave for this purpose, but it is an extra step in the process. In most cases, the practitioner will deal fairly with the landlord and will try to vacate as soon as possible.

Nothing stops the landlord from commencing eviction proceedings or suing the tenant for rent owed when a receiver is privately appointed. A receiver is not protected by any special legislation limiting the rights of the landlord. In the case of a court appointed Receiver, a landlord must apply to the court to exercise its rights.

What if the practitioner does not comply with the notices?

If an insolvency practitioner does not provide possession of the premises to the landlord after all relevant notices have been issued, that practitioner may be held liable for damages and trespass. Once the appropriate notices have been issued, a practitioner must vacate the premises. It is rare that a practitioner will ignore a properly delivered eviction notice and risk personal liability.

When can a landlord lodge a proof of debt?

The landlord can lodge a proof in any liquidation, administration, deed of company arrangement, agreement under Part X or bankruptcy of a tenant.

What can landlords prove for?

A landlord is 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 and that cannot be collected from the practitioner.

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. The landlord can also make a claim for any other amounts that are owing under the provisions of or breach of the lease.

What about mitigation?

A landlord must attempt to mitigate their loss by taking reasonable steps to find a new tenant. The damages claim will consist of rental payments for the term of the lease, minus the amount paid by a subsequent lessee, plus the expense incurred in locating a replacement lessee, etc. At times, these amounts will have to be estimated as the landlord will not be able to determine the exact debt when they will need to lodge a proof.

Can the landlord commence legal action for his debt?

No. Where the landlord has a right to prove for a debt, there is no need to commence any legal action to recover rent. Actions against the insolvent entity will be stayed. Practitioners will process any claims made by landlords and will adjudicate on them under the relevant provisions of the Act. These rental claims will then rank alongside the other non-priority creditors for dividend purposes.

What is disclaiming a lease?

Disclaiming a lease is different from the notices given by administrators and receivers ending an occupancy of a premises.

A notice 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. Usually liquidators (section 568) and Trustees in Bankruptcy (section 133) have powers to disclaim lease contracts. This does not effect the rights of the landlord to prove for any amount is the estate, but allows the landlord to deal freely with the property.

Disclaimer
The enclosed information is of necessity a brief overview and it is not intended that readers should rely wholly on the information contained herein. No warranty express or implied is given in respect of the information provided and accordingly no responsibility is taken by Worrells or any member of the firm for any loss resulting from any error or omission contained within this fact sheet.

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Last Updated: 19.2.2008