Landlords - What to do when your tenant goes belly up!

16th May, 2011

Landlords - what to do when your tenant goes belly up!

If you are an avid reader of the newspaper, you will see that in recent times there have been numerous stories about companies, such as Redgroup Retail Pty Ltd (Angus & Robertson, Borders), entering into voluntary administration.  In our experience, when a tenant enters administration, it is a particularly interesting time for landlords. 

Landlord's rights (tenant in administration)

A lease will survive upon the appointment of an administrator and the tenant will still be liable under the lease. Generally, the rights of the landlord are covered in the terms of the lease which normally contains a provision, such as an ‘ipso facto' clause, dealing with insolvency (which is usually triggered upon liquidation or administration).

What are the common issues?

1. Who is liable to pay rent during the period of administration?

2. What about arrears of rent and future rent?

3. What to do with the fixtures and fittings?

4. Can the tenant stay on and continue to trade?

5. Can the landlord re-take possession of the premises?

Who is liable to pay the rent during the period of administration?

The Corporations Act 2001 provides that the administrator will be liable to pay rent if the tenant continues to occupy, or to be in possession of, the leased property.  This liability will begin five business days after the commencement of administration and apply throughout the period which the tenant continues to use and occupy, or otherwise remains in possession of the property.

If a tenant does not wish to stay and continue to trade from the premises, the administrator may give to the landlord a notice stating that the tenant intends to vacate the property.  However, this does not mean that the landlord cannot recover outstanding rent from the tenant for that period.

What about arrears of rent and future rent? 

For any outstanding rent owing prior to the commencement of the administration, the landlord will be required to lodge a proof of debt to recover this unpaid rent.  This will apply to other amounts owing under provisions of the lease (such as outgoings).

A landlord can also claim for future rental when lodging a proof of debt.  However, since the landlord has an obligation to mitigate loss by taking reasonable steps to find a new tenant, such a claim will be adjusted in accordance with the amount of rent paid by the subsequent tenant

What to do with fixtures and fittings?

Upon expiration or termination of the lease, the tenant is normally required to remove its property (including fixtures and fitting) and reinstate the premises to the condition it was in before any fit-out occurred.

Landlords should exercise caution in relation to disposing any of the tenant's property as it may be owned by a third party or subject to the rights of a financier.  Wrongful disposal may result in a claim for compensation by the third party or financier.

Can the tenant stay on and continue to trade?

The administrator can retain possession of the premises during the period of administration but will be personally liable for the payment of rent.

Can the landlord re-take possession of the premises? 

The landlord cannot take possession of the property unless with the administrator's written consent or with leave of the court.

If the landlord wants to take possession of the property, it will have to take the necessary steps under the lease to evict the tenant (which may include court proceedings).

If the administrator does not provide possession of the premises to the landlord after all relevant notices have been issued, the administrator may be held liable for damages and trespass.

FOR MORE INFORMATION 

At Scoglio Law we can assist you with all aspects of the administration process.  If you are a landlord who is interested in your rights regarding an insolvent tenant, or simply want more information about how our processes can work for you, please contact Tony Scoglio of Scoglio Law on (07) 3833 2100 or email tony@scogliolaw.com.au.

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