Most landlords seek advice prior to entering a commercial lease.
But, as the cautionary tales in this article suggest, if the tenant goes into administration or liquidation, landlords would be wise to seek specialist advice. The lesson is simple: a landlord should not lightly assume that the appointment of an administrator or liquidator implies the end of the lease or a right to re-enter the premises.
In this update from our dispute resolution team, Moulis Legal associate Ben Game reviews two recent cases and forewarns of some of the common legal risks involved in terminating a lease to an insolvent tenant.
Does voluntary administration mean the lease is over?
When a company goes into administration, the administrator assumes control of the company and investigates its financial viability. While this occurs, the voluntary administration framework prohibits creditors from pursuing their claims or applying to wind up the company, meaning landlords cannot commence claims for rental arrears. Landlords also generally cannot re-enter their premises while their tenant is under administration, terminate the lease under an insolvency clause solely because of the administrator’s appointment or even enforce personal guarantees against directors. These restrictions effectively place the lease in a holding pattern until the end of the administration when creditors vote whether to execute a Deed of Company Arrangement or wind up the company. As our first case shows, these restrictions can also hinder the landlord’s plans to install any replacement tenant waiting in the wings.
Misan v Markham Real Estate Partners[1]
The appellant, Mr Misan, was the sole director of Wayl Pty Ltd (Wayl). Through Wayl, Mr Misan sublet a waterfront premises on Sydney’s King Street Wharf where he operated a Japanese restaurant. The respondent, Markham Real Estate Partners (KSW) Pty Ltd (Markham), was Wayl’s sublessor.
On 1 May 2019, Markham served a notice of breach of covenant under s 129 of the Conveyancing Act 1919 requiring Wayl to remedy alleged breaches of its lease by 15 May 2019 or else forfeit the lease. But on the very next day, 2 May 2019, Wayl went into administration.
On 6 May 2019, Wayl’s administrator sought a temporary rental waiver from Markham to allow time to explore a trade-on sale. Markham refused and on 9 May 2019 the administrator served Markham with a formal notice under s 443B of the Corporations Act 2001 confirming that the administrator did not intend to use the premises. However, despite the trade-on sale not eventuating, by the time the locks were changed the administrator had not provided unqualified written consent for Markham to re-enter the premises as required under the Corporations Act 2001.
Markham’s claim for rental arrears and other loss and damage was ultimately heard by the NSW Court of Appeal. Mr Misan contended that Markham’s re-entry did not comply with the NSW statutory breach notice procedures since the locks were changed on 14 May 2019, before the breach notice had expired. The court firstly upheld the trial judge’s finding that Markham had not authorised the premature changing of the locks before considering the tenant’s recent appointment of an administrator and subsequent s 443B notice. The court held that strict compliance with the statutory termination procedure was not fatal to Markham’s claim since by the time of re-entry Wayl’s history of default and its administration showed it had already repudiated the lease.
The Court of Appeal then considered whether Markham’s re-entry complied with the federal voluntary administration framework. Mr Misan argued that re-entry occurred during the administration period yet the administrator had not provided the aforementioned written consent for Markham to re-enter the premises. The Court of Appeal interpreted the administrator’s qualified written statements concerning re-entry in the context of their contemporaneous verbal statements made to creditors, which had authorised Markham to take possession, and found that the requirement for written consent had been satisfied.
Accordingly, Markham’s re-entry was found to be lawful although the case shows the importance of considering and documenting compliance with the voluntary administration framework. Landlords should also carefully consider the administrator’s use, if any, of the premises following the administrator’s appointment and seek advice on re-entry and compensation accordingly.
What about tenants in liquidation?
Even if a tenant goes into liquidation, the lease could remain on foot. If the liquidator does not intend to use the premises they may issue a statutory disclaimer which effectively terminates the lease. However, the decision of the Victorian Civil and Administrative Tribunal (VCAT) in the matter of En Avant illustrates the hazards which may arise when the insolvent tenant starts a new company that operates from the same premises. Coincidentally, this case also concerns a waterfront restaurant, this time on the seaside town of Cowes on Phillip Island.
En Avant Pty Ltd v Baltars & Baltars[2]
The tenant, Veaston Enterprises Pty Ltd (Veaston), went into liquidation on 30 August 2017. Mr Easton, a director of Veaston, agreed to purchase the business from the liquidator through his newly-incorporated company, En Avant Pty Ltd (En Avant), including the transfer of Veaston’s lease.
En Avant and the other parties executed the business purchase agreement on 9 September 2017. Crucially, Veaston’s liquidator would only authorise the transfer of its lease to En Avant upon payment of the purchase price at a later date, with the lease transfer to be formalised in a Deed of Assignment. In the meantime, the agreement allowed En Avant to immediately commence occupation of the premises. However, En Avant did not complete the purchase and the landlords threatened to evict En Avant if alleged rental arrears were not paid.
In January 2018, the landlords issued a notice terminating their lease to En Avant and sought to install a new tenant. In response, En Avant sought an injunction to prevent their eviction, and further, a declaration that they were the lawful tenant of the premises.
The issue before VCAT was whether En Avant was the lawful tenant of the premises despite failing to formalise the Deed of Assignment. En Avant contended that the landlords had verbally indicated after signing the business purchase agreement that they would only require repayment of Veaston’s rental arrears before consenting to the assignment. En Avant also relied on an alternative claim that, by occupying the premises without a formal assignment of lease and paying rent, the landlords had granted En Avant a month-to-month lease.
However, VCAT identified two principal issues with En Avant’s claims. Firstly, since the lease’s assignment to En Avant was not formalised, the lease remained with its predecessor Veaston, despite its liquidation and the liquidator not using the premises. Accordingly, any lease held by En Avant would be month-to-month yet concurrent with Veaston’s lease. It was also unclear how En Avant could rely on the landlords’ alleged promises to facilitate the assignment since any assignment would also require the liquidator’s consent on behalf of Veaston.
Despite these concerns, VCAT granted a temporary injunction allowing En Avant to continue occupying the premises pending further consideration of their claim by the court. The case thus shows the potential for a costly injunction application if a proposed sale of the insolvent tenant’s business goes awry and leads to competing claims over the premises.
Key takeaways
So, what does this all mean for commercial landlords with insolvent tenants? The cases of Misan and En Avant demonstrate why swapping out an insolvent commercial tenant is not as simple as changing the locks. Lawful re-entry of the premises is subject to Australia’s ever-evolving insolvency framework as well as the applicable state or territory leasing legislation, and negotiations with corporate administrators or prospective tenants require careful consideration and recordkeeping. The risk of court proceedings is particularly high when you consider what’s often at stake for the tenant: no lease, no business.
This memo presents an overview and commentary of the subject matter. It is not provided in the context of a solicitor-client relationship and no duty of care is assumed or accepted. It does not constitute legal advice.
© Moulis Legal 2023
[1] Misan v Markham Real Estate Partners (KSW) Pty Ltd [2023] NSWCA 51
[2] En Avant Pty Ltd v Baltars (Building and Property) [2018] VCAT 367
