Tenancy Issues Arising in Insolvency
By Nicole Tyson, Partner
28 July 2009
What should lessors do if faced with an insolvent tenant? Most leases allow the lessor to terminate on the tenant's insolvency, and often before then (for example, when a winding up application is filed). Before deciding whether to terminate however, lessors should consider legal matters including the lessor's contractual position, obligations and restrictions imposed by statute and commercial considerations:
Before exercising a contractual right to terminate, lessors should consider the following legal and commercial issues:
- Notices to be served before valid termination
- Under the lease: does the lease require a default notice to be served before terminating? Most leases will allow automatic termination for insolvency without prior service of a breach notice (giving the tenant opportunity to remedy the breach). However, lessors should check the technical requirements of the lease, and the form of any required notice.
- Under statute: Section 129 Conveyancing Act (1929) applies when a lessor seeks to exercise a right of re-entry or forfeiture arising from a breach of covenant of the lease (subject to certain limited exceptions). The section requires the lessor to serve a notice, before terminating, allowing the tenant reasonable time to remedy the breach. There is conflicting authority in NSW as to whether section 129 applies to a lessor seeking to terminate for insolvency: compare Melacare International v Daley Investments [1999] NSWSC 496 with Della Imports v Birkenhead Investments, 21 July 1987, Supreme Court of New South Wales, Unreported). It is clear, however, that section 129 does not affect a lessor's rights to re-enter or terminate for non payment of rent: section 129(8). Therefore if an insolvent company owes outstanding rent, the lessor may be safer to terminate for non payment of rent, and avoid serving a section 129 notice.
- Can the lessor take possession of the premises? This will depend firstly on whether the lessor can validly terminate. Further, if the company is under voluntary administration, section 440C prevents lessors from taking possession of leased premises during the administration without the administrator's written consent, or leave of the Court. Lessors should also not preclude the possibility of an application for relief against forfeiture being made by an insolvent tenant (if the company is continuing trade whilst under appointment for the purposes of a sale of business, for example).
- What other rights will a lessor have? If the tenant is under administration or in receivership, and the administrator/receiver continues occupation, he or she is liable for rent and other monetary obligations after an initial 7 day grace period: sections 419A and 443B Corporations Act. If the tenant is wound up or becomes subject to a deed of company arrangement, lessors can lodge a proof of debt for outstanding rent and monetary obligations owing until the end of the lease, subject to the obligation to mitigate.
- Commercial Considerations. These include:
- the course the liquidator/administrator/receiver proposes to take: if he/she intends to continue trading for a period, the lessor should consider if the appointee is personally liable for the rent. The lessor may also be able to negotiate a new lease entered into direct with the appointee.
- Proposed assignments: if the appointee is investigating a sale of the assets as a going concern, this usually requires an assignment of the present lease, or entry into a new lease. The lessor should what rights it has to refuse assignment of the lease (particularly for retail leases, where the rights to refuse assignment are limited).
- Whether the lease is at market value, and the demand for the premises: if the premises is being let at market value, and the insolvency appointee is investigating an assignment of the lease, it may suit the lessor to agree to assign the lease to the third party purchaser. If the lease is at an under value, however, and the lessor has other potential tenants prepared to pay a higher value, it may suit the lessor to terminate and take possession. Before doing this, however, the lessor should consider the legal position carefully, including the matters raised above.