The last thing a landlord wants to hear is that their tenant is experiencing financial trouble. It creates uncertainty and potentially affects the landlord’s revenue stream from that property. What happens if the worst case scenario eventuates and the tenant ‘goes under’?
This article is intended to provide general information on how a lease is affected when a tenant company (as opposed to an individual person) is experiencing financial difficulty.
Insolvency or near-insolvency can result in different outcomes for tenant companies; receivership, administration and liquidation are chief among them. What do each of these terms mean and, more importantly, what do they mean for landlords?
Receivership and how it affects the lease
A company is considered to be in receivership when an independent and suitably-qualified person (the ‘receiver’) has been appointed by a secured creditor to take control of some or all of the company’s property/assets. A receiver can also be appointed to manage the company’s affairs, in which case they are a receiver and manager.
A receiver’s main function is to sell enough of the company’s assets to repay the secured creditor’s debt. In this way, a receiver’s primary duty is to the creditor which appointed them. As such, if you are a landlord with whom the tenant has outstanding rent, the receiver does not have to account to you for your debt.
A lease is considered ‘property’ in respect of which a receiver can be appointed. If this occurs, the receiver has seven (7) days in which to give notice to the landlord as to whether they intend to exercise any rights in relation to the lease (i.e. to continue to use the lease premises). If the receiver gives notice that it will not exercise any rights in relation to the premises, then the receiver is not liable for rent for the period under which the receiver is appointed or until the receiver uses the premises.
If no notice is given or the receiver uses the premises, then after the seven (7) day period expires, the receiver becomes personally liable for the rent for the premises until such time as they are no longer appointed or the tenant company ceases to occupy the premises. As a general rule, insolvency practitioners such as receivers are not likely to want personal liability in such circumstances. However, merely remaining in possession of the premises is not enough for a receiver to become personally liable – they must actually use the leased premises.
Importantly, receivership does not prevent the landlord from exercising its rights under the lease with respect to rental arrears or other breaches of the lease (of course, the landlord must still comply with the applicable Property Law Act 1974 (Qld) provisions).
Administration and how it affects the lease
A company goes into administration when an administrator is appointed to manage the company’s affairs. An administrator can be appointed by the directors (if they believe the company is insolvent or near insolvency) or the court. An administrator’s function is to provide creditors with an informed opinion on the fate of the company, whether company can trade out of financial difficulty (and thus should be given back to the directors’ control), or whether the company should be wound up. As such, the administrator’s primary duty is to determine the best option for the creditors of the company (of which the landlord may be one).
The way in which the appointment of an administrator interacts with a lease is substantially identical as the situation with receivers (i.e. the administrator has five (5) business days to give notice as to whether it intends to exercise any rights in relation to the premises and if so, the administrator is personally liable for rent). However, there is one critical distinction: a landlord cannot move to take possession of the premises or commence proceedings to enforce any right under the lease without the consent of the administrator or leave of the court.
Liquidation and how it affects the lease
Liquidation means that the company is being brought to an end. It involves a liquidator being appointed who will sell the company’s assets in order to gather money with which to pay the company’s creditors.
A liquidator can, at any time, ‘disclaim’ the lease (that is, give notice to the landlord that neither it or the liquidated company is bound by the lease). If the lease is disclaimed, then the landlord can re-enter and take possession of the premises (provided the lease permits the landlord to do so). If the liquidator does not let the landlord know its intention with respect to the lease, the landlord can request the liquidator to give notice of their intention within 28 days of the landlord’s request.
As the liquidation of a company means it is at an end, a landlord cannot move to take possession of the premises or commence proceedings to enforce any right under the lease without leave of the court.
So, what is a landlord to do in these situations?
Anecdotally, once a receiver, administrator or liquidator is appointed to the company, the insolvency practitioner usually contacts the landlord to open a dialogue. It is most likely in the landlord’s best interests to work with the appointed practitioner (e.g. provide copies of the lease, proof of debt of rental arrears, etc.) at all stages of the process. This is because the practitioner can keep the landlord up to date and even assist the landlord (for instance, a liquidator may be able to sell the tenant company’s equipment from the premises to the landlord so that any new tenant may benefit).
If:
(i) your tenant is experiencing financial trouble;
(ii) a receiver, administrator or liquidator is appointed (or expected to be); and/or
(iii) you are concerned about how best to engage with the issues,
please give one of our experienced lawyers a call on 07 3392 0099.
Written by Wilson Twist, Lawyer, Wilson Lawyers
Important Notice: This publication is provided as general information only and should not be considered or relied upon as legal advice. The law is complex and you should always obtain specific legal advice about your circumstances from a qualified legal practitioner. If you require legal advice, please contact our office to see how we can help.