Insolvent tenants? Landlords beware: When a Court will stop you from taking possession of your property

If a tenant appoints a voluntary administrator, the Corporations Act protects the administrator from Landlords who would otherwise be able to re-enter the premises.

It is important to act decisively to recover possession of your premises before an administrator is appointed.

A standard administration period lasts for 25 business days. Oftentimes, in complex administrations (like the Virgin Australia administration for example), the administrators can ask the court for an extension and that extension can last for months if not years. The moratorium on taking possession will exist for that entire period.

If the administration comes to an end through a Deed of Company Arrangement (DOCA), then in certain circumstances, the administrator can apply to the court for an order that the Landlord cannot take back possession for the length of the original lease on foot prior to the appointment of administrators.

Deed of Company Arrangement

During an administration period, there are a number of legislative provisions which prevent a landlord from enforcing its rights to recover possession of property, even if the lease has been terminated.

Once an administrator is appointed, one of the options they will consider in order to restructure the company, is whether to enter into a “Deed of Company Arrangement” (DOCA). A DOCA is a binding arrangement between the company in administration and its creditors governing how the company’s affairs will be dealt with. A DOCA will aim to maximise the chances of the company, or as much as possible of its business, continuing, and/or provide a better return for creditors than an immediate winding up of the company.

One of the ways in which a DOCA may maximise the chances of the company, or as much as possible of its business, continuing, may be by including a condition in the DOCA requiring the company to continue to occupy its existing premises. This is particularly so where the nature of the company’s business requires specialised equipment which can be found in the existing premises.

Such a proposal in the DOCA is likely to cause tension in circumstances where the lease for the existing premises has previously been terminated and the landlord would otherwise be entitled to take back possession of the property. Section 444F(4) of the Corporations Act 2001 (Cth) (Section 444F(4)) is designed to deal with these circumstances.

Section 444F(4)

Section 444F(4) provides where a company has executed (or resolved to execute) a DOCA which contemplates continued possession of the existing premises; the Court may order the landlord not to take possession of the property or otherwise recover it (notwithstanding the fact the Landlord may otherwise be entitled to do so).

In other words, if:

• a tenant company is in administration, and
• it has executed (or resolved to execute) a DOCA which contemplates the continued occupation of the landlord’s property; and
• the landlord is entitled to take possession of the property at the end of the administration period because the lease had previously been validly terminated (Original Lease) (generally due to the prior defaults of the company subject of the DOCA);
• the administrators/deed administrators may apply to the Court seeking orders restraining the Landlord from exercising its rights to take possession of the property for the length of the Original Lease (Section 444F(4) Order).

Relevant considerations for the Court

S 444F(5) Corporations Act 2001 (Cth) (Section 444F(5)) sets out the two key considerations that Courts are required to take into account in determining whether to make a Section 444(F)(4) Order:

1. First, whether if the Section 444F(4) Order was not made, it would have a “material adverse effect” on achieving the purposes of the DOCA: and
2. Second, whether the landlord’s interests would be “adequately protected” by the terms of the DOCA and/or the terms of the Section 444F(4) Order and/or any other relevant matter.

The answer to the first question is typically self-evident. Where Section 444F(4) orders are sought, one of the purposes of the DOCA will be to allow the company (or the company’s business) to trade on. In those circumstances if Section 444F(4) orders are not made it would mean the company (or the company’s business) would be unable to trade on. Such a consequence will satisfy the “material adverse effect” requirement.¹

The answer to the second question is determined by reference to the interests the landlord had under the Original Lease. Those interests will typically include receiving amounts due under the terms of the Original Lease and ensuring compliance with the terms of the Original Lease.² Such interests are distinct from, for instance, the landlord’s interest in exploiting a default under the Original Lease.³

The onus on establishing that the interests of the landlord are adequately protected falls on the deed administrator. In determining whether this criteria has been satisfied, a Court will consider factors including:

• whether there are any funds outstanding under the Original Lease, and if so, whether it is proposed those funds be repaid;
• the timing of the termination of the Original Lease relative to the appointment of Administrators;
• whether the conditions proposed by those seeking the Section 444F(4) Order would facilitate compliance with the Original Lease; and
• evidence concerning the financial capacity of the DOCA proponent to meet the obligations of the Original Lease.

Takeaways

If you are a landlord who wishes to terminate a lease and take possession of your property – you should do so as quickly as possible and before the appointment of Administrators.

If you are an insolvency practitioner appointed to a company occupying a property in respect of which the lease has been terminated – you are able to continue to occupy the property and consider a DOCA which contemplates continued occupation provided certain conditions are met.

In either situation, Hamilton Locke is well placed to assist and advise both landlords and administrators in relation to the above circumstances. For more information, contact Brit Ibanez.

¹See for instance Vincent Cold Storage Pty Ltd v Centuria Property Funds No 2 (Limited) (No 2) [2023] VSC 314; Strazdins v Birch Carroll & Coyle Ltd (2009) FCR 300.

²Re Hi-Fi Sydney Pty Ltd (admin apptd) [2015] NSWSC 1312.

³Ibid.