What happens if your Commercial tenant becomes insolvent?

Long Saad Woodbridge’s Guide for Landlords

Many landlords are unsure of their rights and entitlements if a tenant under a commercial lease becomes insolvent and a liquidator is appointed to manage the tenant’s affairs. This guide is for landlords to help them navigate their way through such a state of affairs. Common concerns of Landlords include:

1. Who, if anyone, is liable for rent during this period?

   The liquidator is not personally liable for rent or arrears, but whilst they occupy the premises, the rental costs are classified as a ‘liquidator’s expense’. Once the company’s assets have been liquidated, the landlord may have a ‘priority right’ within the unsecured creditors to receive compensation, consistent with the Corporations Act. When the company’s assets are being liquidated, a landlord is likely to receive the rent payable under the lease during the period of occupation, and may be able to claim arrears if they are proven to be valid and in accordance with the lease.

2. Can I reclaim the premises?

   Most leases contain provisions that provide the landlord with grounds to terminate if the tenant is insolvent. Further, the failure to make rent payments may also provide the grounds to terminate a lease. The landlord may be able to terminate the lease and re-enter the premises during liquidation. However, the liquidator has the right under the Corporations Act to respond to a notice by the landlord that they intend to reclaim the premises, stating that they need to occupy the premises for the process of liquidation and therefore denying the landlords reclaim of the premises.Landlords can appeal to the court to enforce their right to reclaim, but it is rarely granted.

3. What if the lease is disclaimed?

   The liquidator may decide to “disclaim” the lease, which means that the obligations stemming from the lease are extinguished. The liquidator may do this so they can sell certain premises without any existing tenants.This effectively removes any rights or obligations between the tenant and landlord. The Corporations Act provides for specific compliance requirements and some implications of disclaiming a lease. These requirements and implications include:

   • The landlord needs to be notified by the liquidator if the lease is disclaimed;
   • The landlord is then considered a creditor of the tenant.
   • The disclaimer takes 14 days from notice to those with an interest in the property to take effect if no applications to set aside are made.

   As a result, the landlord has 14 days from notice of the lease being disclaimed to appeal to the Court to prevent this if they are unhappy with this happening. If the disclaimer would be detrimental to the Landlord, the Court may intervene

4. What form of debt recovery can I seek, and what am I likely to receive?

   The liquidator will divide the realised assets of the insolvent company in priority in accordance with the Corporations Act. Landlords become unsecured creditors of the tenant and can claim their entitlements and arrears on their debt, subject to the findings and decisions of the Court and the liquidator. Tenants providing a bank guarantee should always be a condition of a lease in the first place, as liquidation does not affect the right of the landlord to claim against a bank guarantee. Aggrieved landlords can, and should, claim under this security if it exists.

Long Saad Woodbridge’s Comments

Landlords should ensure that their initial lease is designed to protect their interests in the event of a tenant becoming insolvent, affording them the right to terminate and providing them with financial security in anticipation of this unfortunate scenario. If you suspect that a tenant is nearing insolvency, or a liquidator has been appointed, or you wish to enter into a lease with a tenant, our specialist team will ensure you are legally protected and assist in maximising the recovery of any debt owed to you. Please get in contact with us for further information and assistance. Please note we anticipate that the assistance measures will be amended and expanded upon in the coming days. We will aim to provide you with a further update once the Government makes further announcements. If you wish to discuss any of the above further please feel free to contact Dean Woodbridge on (02) 9279 4888 or dwoodbridge@lswlawyers.com.au