Liquidators versus landlords: who wins?

When a tenant goes bust, there’s a big impact on the landlord. 

The insolvency practitioner appointed to the tenant has rights and powers under the Corporations Act 2001 (Cth) while the landlord has rights and powers under the lease with the tenant.

Here’s a run-down of who can do what.

Start at the beginning and look at the lease 

The lease is a binding contract between the tenant and landlord, so it’s the first thing to read when the tenant becomes insolvent.

For example, the lease might say that any insolvency event of the tenant constitutes such a breach that the lease is immediately terminated.  Otherwise, the insolvency event may be a breach and the lease stays on-foot at the option of the landlord.

In any event, the appointment of an insolvency practitioner to the tenant doesn’t waive the tenant’s liability to any rent or other amounts outstanding under the lease.

What happens when a receiver is appointed to the tenant? 

A company typically goes into receivership when a secured creditor appoints a receiver to those assets of the company over which the creditor has security. The receiver’s role is to collect and sell enough of the company’s charged assets to pay back the debt owed by the company to the secured creditor.

If a receiver is appointed to a tenant company:

• Within the first 7 days after the appointment, the receiver can give the landlord notice that the receiver doesn’t intend to exercise any rights in relation to the landlord’s property, which means the receiver isn’t personally liable for rent or other amounts payable under the lease during their occupation of the landlord’s premises.  

• If no notice is given, the receiver is personally liable for rent and other amounts payable under the lease from 7 days after the receiver’s appointment until:  

the receiver retires from their appointment; or the company ceases to occupy the landlord’s premises.  

• The receivership doesn’t affect the rights of creditors, which means the landlord can move to take possession of the premises, or enforce the terms of the lease, or commence legal action against the tenant (eg to recover rent arrears).  

• The company does remain liable for rent and other amounts owing under the lease before the receiver’s appointment.  

• Personal guarantees under the lease can be enforced by the landlord during the receivership.

What happens when an administrator is appointed to the tenant? 

An administrator is usually appointed by a company’s directors after they decide the company is insolvent or likely to become insolvent.  The effect of the appointment of an administrator is to provide the company with “breathing space” while the company’s future is contemplated and resolved.

If an administrator is appointed to a tenant company:

• Within the first 5 days after the appointment, the administrator can give the landlord notice that the administrator doesn’t intend to exercise any rights in relation to the landlord’s property, which means the administrator isn’t personally liable for rent or other amounts payable under the lease during their occupation of the landlord’s premises.  

• A notice will cease to have effect if: the administrator revokes the notice in writing; or the company exercises, or purports to exercise rights in relation to the landlord’s property (eg continues to trade from the premises).  

• If no notice is given, the administrator is personally liable for rent or other amounts payable under the lease from 5 days after the administrator’s appointment for so long as: the company continues to use, occupy or be in possession of the premises; and the administration continues.  

• The administration does affect the rights of creditors, which means the landlord can’t move to take possession of the premises, or enforce the terms of the lease, or commence legal action against the tenant (eg to recover rent arrears) without: the administrator’s consent; or leave of a court.  

• The company does remain liable for rent and other amounts owing under the lease before the administrator’s appointment.  

• Personal guarantees under the lease can’t be enforced by the landlord during the administration.

What happens when a liquidator is appointed to the tenant? 

A liquidation brings a complete end to the company. It involves a liquidator realising (selling) the company’s assets, cessation or sale of its operations, distributing the proceeds of realisation among its creditors and distributing any surplus among its shareholders.

If a liquidator is appointed to a tenant company: 

• At any time the liquidator can disclaim the lease and vacate the landlord's premises, which means: the liquidator isn’t personally liable for rent or other amounts payable under the lease and nor is the company during the liquidator’s occupation of the premises; and the landlord can, if permitted by the lease, re-enter and take possession of the premises.  

• If the lease isn’t disclaimed and the liquidator stays in the premises, the liquidator still isn’t personally liable for rent or other amounts payable under the lease although these amounts will be treated as expenses incurred in the liquidation (and therefore paid out of the proceeds of sale of the company’s assets).  

• If the lease hasn’t been disclaimed and the liquidator hasn’t otherwise advised their intentions, the landlord can issue a notice asking the liquidator to confirm their position about the lease and the liquidator has 28 days to respond.  

• The liquidation does affect the rights of creditors, which means the landlord can’t continue or commence legal action against the tenant (eg to recover rent arrears) without leave of a court.  

• The company does remain liable for rent and other amounts owing under the lease before the liquidator’s appointment.  

• Personal guarantees under the lease can be enforced by the landlord during the liquidation. 

What does it all actually mean? 

Our experience of what actually happens and our tips for landlords about how to deal with the situation are these: 

• The insolvency practitioner appointed to the tenant contacts the landlord as soon as possible to say they’ve been appointed and “let’s talk”.  

• The landlord tells the insolvency practitioner the debt currently owing by the tenant under the lease for rent and other amounts, and provides the practitioner with a copy of the lease and proof of the debt. 

• It’s in the landlord’s best interests to work with rather than against the insolvency practitioner to deal with the tenant’s problems, which might include:  

helping the practitioner find a buyer for the tenant’s business in whole or part, and that buyer taking a new lease in the premises;  

if the lease is terminated and disclaimed by the insolvency practitioner, the landlord alone finding a new tenant to go into the premises as quickly as possible; or  

the landlord buying the tenant’s business or assets (eg fit out) from the practitioner and leaving the assets in-situ for a new tenant.  

• Subject to the terms of the lease, the landlord should call upon the tenant’s bank guarantee and take advice on whether any personal guarantee can be pursued as a means to recover the pre-external administration (or any other) debt owing by the tenant under the lease as soon as possible. 

• The landlord has rights as a creditor in the external administration, so should stay engaged and attend creditor meetings with the insolvency practitioner.  

• The landlord should be prepared to have some amount of rent forever unpaid by the insolvent tenant because an insolvent company’s debts are greater than its assets, and there’s only ever a finite amount of money to be split between all the tenant’s creditors.  

This article was produced by Meyer Vandenberg lawyers.