Commercial Property Landlord Rights when a tenant does not pay or faces Liquidation or Receivership

As a landlord of commercial property it is important for you to understand your rights and responsibilities to ensure you don’t inadvertently breach legislation and obligations. If you do, you may face significant liability.


A Deed of Lease details the relationship and terms/conditions between a commercial landlord and tenant. The Property Law Act 2007 (“PLA”) defines rights and obligations of landlords and tenants. The Unit Titles Act 2010 can also apply if the property is a unit title.


A commercial landlord has obligations to comply with the Building Act 2004 and Building Code and to complete a building warrant of fitness for Council.


A commercial landlord also has obligations to maintain the building, comply with health and safety standards. A tenant has obligations to maintain the premises and the Deed will often extend to obligations as to damage/loss, painting, floor coverings, rubbish removal, etc.


When can a landlord terminate a lease?


If the tenant is in breach of its obligations to the landlord, the landlord may be entitled to terminate the lease.  Where a landlord wants to terminate a lease, the PLA requires notice to be served on the tenant in accordance with section 245 of the Property Law Act 2007.


The notice of intention to cancel a lease must expire before a landlord re-enters the premises. A notice must be sent setting out the nature of the breach and remedy required and the rights of the tenant.


The PLA says a landlord may only cancel a lease for non-payment of rent, if rent is at least 10 working days in arrears. A landlord may also cancel for reason of insolvency, liquidation or bankruptcy of the tenant. Once the statutory timeframe expires the landlord can re-enter and seek to mitigate its loss by re letting the premises. The landlord however needs to be wary of the rights of secured creditors to the company assets.  There are however a myriad of priority issues that need to be considered and the landlord must give notice and reasonable time for the chattels to be removed.


What If Your Commercial Tenant Goes Bust?


A good commercial lease contains ‘ipso facto’ clauses, which specifically provide for insolvency, which is usually triggered by the tenant entering into liquidation or administration or receivership or becoming bankrupt. The lease usually survives the appointment of an administrator or receiver but may end on liquidation.


A landlord can seek judgment against the guarantor and following judgment issue bankruptcy proceedings against a guarantor on failure to pay.


If the Commercial Tenant Fails To Pay?


Tenants by vacating the premises and leaving rents in arrears are not released from their legal liability. While the lease remains on foot, rent continues to accrue, and the tenant and guarantors are liable. The tenant under the Deed of Lease may be required to continue the lease obligation for the balance of the term of lease and can be liable for reasonable costs incurred in re-tenanting the premises. If the company has no ability to pay, a guarantor may be pursued.


A landlord can issue a statutory demand and following failure to make payment under that demand issue winding up proceedings against their tenant company if there is a failure to pay, a default under the terms of the lease and suspicion of insolvency.


Often landlords protect their position by requiring some form of deposit or a bank guarantee to avoid the more costly recovery options and for better protection.


A landlord has no right to take possession of the tenants’ belongings and sell them to cover unpaid rent. Some more current deeds of lease however can now require the tenant company to grant a GSA at the same time as granting the lease. Depending on the wording, this can provide the landlord with the entitlement to recovery of fixtures and fittings and potentially chattels. A well drafted Deed that grants security in assets can provide protection to the landlord in the event of insolvency of their tenant.


If The Commercial Tenant Faces Liquidation or Receivership


Most Deeds of Lease provide for the termination of lease in the event of the tenants’ company being placed into liquidation. If there are arrears, the landlord is entitled to file a claim in the liquidation.


Often a liquidator will seek to trade or to occupy the premises for a period to realise value in the company assets.


If the company occupies the premises then the liquidator can be liable for payment of rent from the date of liquidation. A liquidator may disclaim the lease at which time the rights and obligations of the tenant end.


In Receivership, a receiver has no right to disclaim a lease and can be held personally liable for rent and lease payments from 14 days after the appointment date until the occupation ends or receivership ends.


Most Deeds of Lease will allow the landlord to cancel the lease if a Receiver is appointed.


Liquidation or Receivership will more often than not end the landlord and tenant relationship.


Final Observation


Overall, a Landlord’s rights depend on the terms of their Lease Agreement. Always include specific provisions for liquidation or receivership or administration in a commercial lease. Remember, if the lessor has not given the tenant the notice specified in a commercial lease before enforcing a right of re-entry, the tenant may have remedies against the lessor and apply to the court for relief.


A well documented Deed of Lease will provide for a deposit or bank guarantee, a personal guarantee and/or general security over specific assets such as fixtures and fittings.


If your commercial tenant has vacated leaving rent arrears, or is potentially trading insolvently contact McDonald Vague as an option may be to start the winding up process.

 

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