What happens when a commercial tenant goes broke?

The Issue:

Despite the terms of the lease, an insolvent tenant is protected by the Corporations Act 2001. There are three broad types of insolvency administration applicable to a commercial tenant as companies: administration, receivership and liquidation. Each scheme is different.

An administrator is appointed by either the company or a secured creditor of the company, whose purpose is to act for the best interests of the company.

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During administration;

• There is no automatic right to end an existing lease, although the administrator can end the lease in accordance with its terms,
• The administrator is personally liable for rent for the period the administrator is in possession of the premises, and

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Receivership;

• The lease remains in force and the receiver is personally liable for rent,
• Receivers can avoid contracts (including leases) that they do not wish to honour and the landlord's recourse would then be against the company and its guarantors, and

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Liquidation;

• A liquidator has the power to disclaim a lease at any time and must give notice to the landlord, who is then treated as a creditor of the company in relation to any unpaid rent up to the date of disclaimer,
• The landlord may also claim damages for the difference in rent that would have been received during the remainder of the term less what could be obtained by re-letting at market rates, and
• The landlord is able to attempt to challenge a disclaimer.

Practical Tip:

If you find out that your commercial tenant becomes insolvent, it is extremely important to find out the type of insolvency scheme the tenant is under, as this will affect what you can or cannot do.

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The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

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