Voluntary administration and leases

With the recent and highly-publicised financial woes of both the Dick Smith and Laura Ashley retail chains, landlords of commercial tenancies may well be asking themselves: What would this mean for my lease?

The Voluntary Administration process

Laura Ashley and Dick Smith have entered into a voluntary administration, which means that their directors have handed control of these companies over to an independent Administrator for a limited period.

During the administration, the Administrator will investigate the company’s affairs, convene meetings of creditors, assess the business of the company (usually its solvency) and ultimately provide a written report to creditors giving the Administrator’s opinion on whether the company should:

  • be liquidated;
  • enter into a deed of company arrangement (where the debts are compromised in some way and allow the company to continue); or
  • be returned to the control of the directors.

What rights do landlords have?

In most cases the appointment of an Administrator also buys the company some “breathing space” and (even though the lease itself may permit termination of the lease in the case of insolvency) the landlord will be prohibited from recovering possession of the premises until the end of the administration period.

However, you can usually begin the recovery process under the lease as soon as the Administrator is appointed.  Importantly for property owners, within 5 business days, the Administrator must decide whether the company will continue to occupy a leased premises and advise the landlord of its decision.  If the company remains in occupation, the Administrator will be personally liable for the rent during the administration period.

Key points for landlords:

  • Be diligent in following up rent and payments from your tenants.  At the first sign of financial difficulty, contact your tenant to find out more about their situation, and if necessary, take action before they appoint an Administrator.
  • Review your lease security regularly.  If the lease gives you the right to require increases in the security as the rent increases, do so.
  • Regularly review the circumstances of any guarantors to ensure that you have sufficient priority security to protect you in the event of a debtor company being incapable of meeting the terms of its lease.
  • If you do plan to hold a (cash) security deposit rather than a bank guarantee, make sure you protect and register your interest on the Personal Property Securities Register.  Without this, you may lose the benefit of the security deposit if an Administrator is appointed, and for this reason, bank guarantees are preferable to security deposits in insolvency situations.
  • As soon as the tenant announces it has entered into voluntary administration, be proactive and contact the Administrator.  It’s likely you will be able to quickly judge whether the Administrator will help the company trade out of its difficulties or if it plans to recommend its liquidation.
  • If you are owed rent, you can make a claim for this by a “proof of debt” which is lodged with the Administrator.  This will give you the right to attend a creditors’ meeting and vote on the recommendations of the Administrator.

This article is not intended to deal with the effect of a debtor company entering into administration and the rights of secured and unsecured creditors.  If you have any questions about your rights as a landlord, or about any of the matters raised in this article, please contact:

Daniel Morgan
M: 0438 436 968
E: dmorgan@pageseager.com.au

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