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Focus: Landlords' enforcement of possession during company administration

25 November 2011

In brief: Landlords need to be aware of moratorium provisions under the corporations legislation that may prevent them from enforcing their rights to possession of premises where the tenant is under administration. Senior Associate Amy Hoban and Law Graduate Ashleigh Dixon report on a recent Victorian Supreme Court decision.

How does it affect you?

  • Landlords should, first, be aware of the section 440C statutory moratorium period, which, although it initially lasts for 20 days from the appointment of administrators, may be extended by the court.
  • Landlords may seek to mitigate the risk of similar circumstances arising, by insisting on 'subject to vacant possession clauses' being included in agreements for lease and/or fit out agreements with incoming tenants.
  • When a landlord becomes aware that a tenant is subject to external administration, they should promptly determine a strategy for dealing with the premises in the future, eg obtaining legal advice as to the extent of their rights.

The facts

The plaintiffs were members of the Westfield Group, and landlords of Westfield Southland (Southland) and Westfield Carousel (Carousel).

Each landlord leased premises to the defendant, Colorado Group Ltd (Colorado), which was placed into administration under Part 5.3A of the Corporations Act 2001 (the Act) on 30 March 2011. On the same day, receivers and managers were appointed to Colorado.

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Southland premises

The lease for Southland was for five years, commencing on 3 April 2006. The landlord began negotiations for renewal of the lease six months before its expiry. However, Colorado failed to respond to the landlord's final proposal, dated 23 March 2011, and the lease expired on 2 April 2011. In the meantime, the landlord had entered into negotiations with another tenant regarding another site at Southland, which would require the relocation of three existing tenants. As renewal negotiations with Colorado had stalled, the landlord agreed with one of these tenants, Blue Illusion, to a lease of the Colorado premises on expiry of the Colorado lease.

Administrators were appointed to Colorado three days before the lease at Southland expired (2 April 2011) and the landlord was precluded from obtaining possession of the premises, despite expiry of the lease, as a result of the moratorium provisions of s440C of the Act.1 This resulted in Blue Illusion not being relocated to the Colorado premises as agreed, the landlord losing $17,000 in rent per month, and having to contribute costs upwards of $50,000 towards the fit-out and conversion of a temporary store for Blue Illusion.

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Carousel premises

The lease for the Carousel premises was initially for a five-year term; however, it was subject to two extensions, the second of which extended the lease until 17 May 2011. At the same time as granting the second extension, the landlord enclosed a Notice to Vacate, requiring the premises to be vacated by 17 May 2011. On Colorado vacating the premises, the landlord intended to undertake reconfiguration works, in order to create two new premises, and commence two new leases.

Colorado went into administration after the second extension was granted but before the expiry of the extension and the date set for vacation. Colorado refused to vacate the premises on 17 May 2011, which was during the moratorium period. It was therefore not possible for the landlord to complete the reconfiguration works or allow the new lessees to occupy the premises and, as a result, the landlord faced a potential claim from the new lessees for damages for breach of their agreements for lease.

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Landlords' submissions

Both landlords sought the Victorian Supreme Court's leave to enforce their proprietary rights to take possession of the Colorado premises.2

The key submissions the landlords made to support their leave application were as follows:

  • The landlord's proprietary rights should not be affected by reason of the operation of the s440C moratorium, particularly where the tenant's continued occupation was causing the landlord to suffer significant financial loss.
  • As both leases had expired, Colorado could not offer any potential purchaser a lease of either premises and could not remain in possession of the premises on expiry of the moratorium period.
  • The landlords had suffered ongoing financial loss because of Colorado's refusal to vacate the premises.
  • There was no evidence that the closure of the stores at Southland and Carousel would affect the likelihood of a successful sale or restructure of Colorado.
  • There had been no delay in the landlords bringing the applications and, for the Southland store, the receivers and managers acted unreasonably in not agreeing to a relocation after expiry of the lease, which would have enabled Colorado to continue trading at Southland.

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Colorado's submissions

The key submissions made on behalf of Colorado against the grant of leave were as follows:

  • The grant of leave for the Southland and Carousel stores would reduce the likelihood of a successful sale or restructure of the Colorado business because key revenue-generating stores would have to be closed (although the court noted that these stores' contribution to Colorado's revenue was not established).
  • The continuation of the business as a going concern was beneficial to unsecured creditors, including the employees who retained their employment and trade creditors who continued to receive income from supplying goods.
  • The grant of leave to one or two landlords might lead to other landlords making similar applications, and this would endanger a going concern sale and prejudice the interests of a large number of creditors.

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The decision

In considering applications for leave under s440C, the court weighed up the interests of the plaintiffs, whose proprietary rights for the premises were substantially affected by operation of the moratorium, against the object of the administrators, which was to preserve the business of Colorado as a going concern, and thereby increase the likelihood of a successful sale or restructure.

The court held that the plaintiffs should be granted leave to enforce their rights to possession of the premises. In reaching his decision, Associate Justice Gardiner concluded that enforcing the plaintiffs' proprietary rights would not materially impact on the administration or viability of the business as a going concern.

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Conclusion

Although the court said that every set of circumstances for a landlord will be different and considered on their own merits, this case demonstrates that landlords have the ability to challenge the statutory moratorium that benefits administrators to protect their proprietary interests.

Footnotes
  1. This provision provides that, during the administration of a company, the owner or lessor of property that is used or occupied by, or is in the possession of, the company cannot take possession of the property or otherwise recover it, except with the administrator's written consent or the court's leave. The statutory moratorium period applies during the convening period, which is usually 20 days beginning on the day after the administration; however, as happened in this case, the court can extend this period.
  2. Ventana Pty Ltd v Colorado Group Ltd (Admins appt) (Recs & Mgrs apptd) [2011] VSC 552.

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