My commercial tenant has gone bust! What do I do?

We live in interesting times when on any given day you are likely to find an article or two in the newspaper about businesses entering into voluntary administration. Recent examples include Pie Face and Eagle Boys Pizza.

Landlords of commercial premises rely on income from their commercial tenants to pay their mortgage or cover their costs of holding the investment. So what happens when a commercial tenant enters into external administration due to solvency issues? This article will deal with the situation when a tenant enters into administration.

Your rights as a landlord

Generally, a landlord’s rights are set out in the terms of the lease. Examples of such provisions are ‘ipso facto’ clauses, which specifically deal with insolvency (usually triggered upon liquidation or administration). The lease will survive upon the appointment of an administrator and the tenant will still be liable under the lease.

Who is liable to pay rent during the administration period?

Should the commercial tenant continue to occupy, or stay in possession of the leased property, the Corporations Act 2001 provides that the administrator will be liable for the payment of rent. This liability commences five business days after the commencement of the administration and will continue so long as the tenant continues to use, occupy or otherwise be in possession of the premises.

Should the tenant wish to vacate the premises, the administrator may give the landlord a notice of intention to vacate. During this vacation period the landlord will be unable to recover outstanding rent from the tenant for that period.

What can be done with the commercial tenant’s fixtures and fittings?

Landlords should exercise caution in relation to the disposition of any of the tenant’s property. When the lease expires, the tenant is ordinarily required to remove all of its property (including fixtures and fittings) and reinstate the premises to the condition it was in before any fitout occurred. However, if the property belongs to a third party or is subject to the rights of a financier, removing it by the landlord without authority may give rise to a claim in compensation by the third party or financier against the landlord so you should seek advice first.

What is to happen with arrears of rent and future rent?

In order to recuperate any rent owing before the commencement date of administration, the landlord must lodge a proof of debt. This will also apply for any other amounts recoverable and owing (such as outgoings) under the lease. A claim may also be made this way for future rental loss, however will be adjusted upon the finding of a new tenant, which the landlord is obligated to seek in accordance with their responsibility to mitigate loss.

Can the commercial tenant stay on the premises and continue to trade?

If the administrator wishes to stay on and retain possession of the premises during the period of the administration, he or she may do so however they become personally liable for the payment of rent.

Is it possible for the landlord to retake possession of the premise?

The landlord may only retake possession of the premises if the administrator provides written consent to do so, or the landlord is given the leave of the Court.

To regain possession of the property the landlord must take the necessary steps under the lease to evict the commercial tenant (including Court proceedings if necessary).

If after all the relevant notices have been issued, and the administrator fails to hand over possession of the premises to the landlord, the administrator can be held liable for trespass and damages accordingly.

The key take away from this article is to seek legal advice first.

At DSS Law we are experienced in advising landlords (and tenants) in relation to their position if either party enters into external administration.

If you have any queries or require additional information, please contact our experienced property and commercial lawyers on 07 3210 2373 or via email epost@dsslaw.com.au.

14/09/2016

DSS Law insight articles are intended to provide commentary and general information. They should not be relied upon as formal legal advice. If you would like specific advice relating to this topic, please contact DSS Law on epost@dsslaw.com.au.