When your tenant enters liquidation or receivership: Practical considerations for landlords

This is Part Two of our three-part series exploring tenant insolvency.

In Part One, we examine the voluntary administration process and its immediate impact on landlords’ rights.In Part Two, we examine liquidation and receivership, and the impact these processes have on landlords’ rights and obligations following the appointment of an external administrator.In Part Three, examines three key issues for landlords across all insolvency scenarios: security and guarantees, the Personal Property Securities Act 2009 (Cth) (PPSA), and abandoned goods.

In this article, we turn to two further insolvency scenarios that landlords commonly encounter - liquidation (or winding up) and receivership. While voluntary administration is a restructuring tool designed to maximise the prospects of a company’s survival, liquidation and receivership represent fundamentally different processes, and they carry different consequences for landlords.

Liquidation is a terminal process. Its purpose is to wind up the company’s affairs, realise its assets, and distribute the proceeds to creditors. By contrast, a receivership is initiated not by the company or a court (in most cases), but by a secured creditor seeking to recover its debt by realising the assets over which it holds security. Understanding these distinctions is critical because a landlord’s rights and the steps it should take to protect its position differ significantly depending on which process is in play.

Liquidation: what it means for landlords

What is liquidation?

Liquidation is the formal process by which a company's affairs are wound up for the benefit of creditors. An independent and qualified liquidator is appointed to take control of the company, investigate its business and financial affairs, recover and realise assets and distribute the available funds in accordance with the priorities set out in the Corporations Act 2001 (Cth).

There are broadly two types of liquidation:

1. Voluntary liquidation - initiated by the company’s members or creditors.
2. Court-ordered liquidation - commenced by application to the court.

For a landlord, this means that at the conclusion of the liquidation process, the tenant company will ultimately cease to exist, and any ongoing lease obligations will need to be addressed in that context.

The liquidator’s right to disclaim the lease

A key feature of Australia’s insolvency regime is that a liquidator can disclaim a lease, allowing them to end ongoing lease obligations where doing so benefits the liquidation. A disclaimer effectively terminates the lease, leaving the landlord to prove in the liquidation for any loss suffered as a result of the termination.

Importantly, landlords are not required to wait indefinitely for a liquidator to decide whether a lease will be disclaimed. Where no disclaimer has been issued, a landlord may require the liquidator to state its intentions, with the liquidator generally required to respond within 28 days unless the court orders otherwise. This provides landlords with a mechanism to obtain greater certainty and make informed decisions about the future of the premises.

In limited circumstances, a landlord may apply to the court to set aside a disclaimer where it would cause substantial prejudice to the landlord’s rights. However, the threshold for successful intervention is high, and courts will not readily overturn a liquidator’s decision to disclaim.

Rent and the liquidator’s personal liability

Unlike voluntary administration, where an administrator may become personally liable for rent after the five-business-day rent-free period, a liquidator does not assume personal liability for rent in a liquidation. As a result, landlords cannot look to the liquidator personally for payment, even where the tenant remains in occupation of the premises.

That said, landlords are not left without protection. Where a liquidator elects to remain in possession of the leased premises during the liquidation, rent and other lease-related costs for this period may be treated as expenses of the liquidation. Those expenses generally rank ahead of unsecured creditor claims, providing landlords with a priority claim for ongoing occupancy costs.

Proving in the liquidation

Where rent or other amounts remain unpaid at the date of liquidation, the landlord is entitled to lodge a proof of debt (POD) in the winding up. Similarly, where the lease is disclaimed by the liquidator, the landlord may prove for the loss it suffers as a result of the early termination of the lease. However, landlords should be aware that as unsecured creditors, the dividend received (if any) is often modest.

Receivership: what it means for landlords

What is receivership?

A receiver is appointed by a secured creditor under the terms of a security agreement to preserve, manage and realise the relevant secured assets for that creditor’s benefit. This distinguishes receivership from both voluntary administration and liquidation, where the focus is on the interests of creditors as a whole. In a receivership, the receiver’s primary obligation is to the appointing secured creditor.

While the Corporations Act 2001 (Cth) (Corporations Act) imposes certain duties and obligations on receivers, the scope of a receiver’s powers is determined by the terms of the underlying security document and the instrument of appointment. As a result, a receiver’s powers can be extensive and highly tailored to the circumstances of the appointment.

Rent and the receiver’s rent-free period

In circumstances where a receiver is appointed over the tenant's business, pursuant to section 419A(2) of the Corporations Act, the receiver is not personally liable for rent during the first seven days of the receivership. This period provides an opportunity to assess the receiver's strategy for the business and, in particular, whether continued occupation of the premises is necessary to preserve value or facilitate a sale of the business as a going concern.

The receiver’s inability to disclaim the lease

Unlike a liquidator, a receiver does not have the power to disclaim a lease. It means the lease continues to operate unless it is otherwise terminated in accordance with its terms or by agreement between the parties. As a result, landlords are often in a stronger position in a receivership than in a liquidation, where a liquidator may be able to disclaim the lease and limit ongoing obligations.

Deeds of entry or possession

In practice, a receiver will commonly seek to enter into a deed of entry or possession with the landlord. These deeds govern the terms on which the receiver may access and deal with property at the premises. Landlords should approach these deeds carefully, having regard to the following considerations:

• Who owns the personal property within the premises: the landlord, the receiver (on behalf of the secured creditor) or a third party?
• Does the receiver have the right to remove property from the premises, including after the expiry of the lease, and should this right be limited?
• Receivers often seek unlimited power to enter the premises, including after termination of the lease, and landlords should resist overly broad access rights.
• Landlords should seek a release from the tenant regarding the entry of the premises by the receiver.

A receiver is also likely to seek a release from the landlord in respect of the exercise of their powers. Landlords should take care not to release claims they may wish to pursue against the tenant or other third parties.

Property

To minimise disputes in an insolvency scenario, landlords should identify any landlord-owned property located at the premises in the lease and maintain a detailed register of those assets. Records should include descriptions, serial numbers, photographs and installation details. Clear documentation can be critical in establishing ownership and recovering assets that might otherwise be treated by an external administrator as part of the tenant's estate.

Landlords should also ensure that any security interests they hold over a tenant’s property are properly registered on the Personal Property Securities Register (PPSR) to maximise protection and preserve priority rights.

Practical steps for landlords

Upon learning that a tenant has entered external administration, landlords should take the following steps promptly:

1. Understand the type of appointment. A landlord’s rights and remedies can differ significantly depending on whether a tenant is subject to voluntary administration, liquidation or receivership. Identifying the type of insolvency appointment and the relevant external administrator at an early stage is critical to understanding your position and available options.
2. Act without delay. Move quickly to fully understand your rights. Early engagement can be critical to protecting the landlord’s position and maximising available recovery options. and engage with the liquidator or receiver at the earliest opportunity.
3. Review your security position. Promptly assess any available security, including confirming whether you hold a bank guarantee, security deposit or personal guarantee. Take steps to realise that security where appropriate.
4. Seek certainty on the lease. In a liquidation, landlords should consider requiring the liquidator to state its position on the lease. A landlord can require the liquidator to decide within 28 days whether to disclaim or retain the lease, providing greater certainty over the property’s future.
5. Review any proposed deed of entry or possession. Ensure the terms adequately protect the landlord's interests, including in relation to access rights, removal of property, and releases.
6. Lodge a proof of debt. Where amounts remain outstanding under the lease, landlords should promptly lodge a proof of debt to preserve their claim in the liquidation.
7. Document landlord-owned property. The lease should clearly identify any landlord-owned property at the premises, supported by a register containing photographs, serial numbers and other identifying details.
8. Review the lease for abandoned goods provisions. Check the lease and any applicable legislation dealing with uncollected or abandoned goods to understand the options available if property is left at the premises.

Key risks and traps for landlords

Landlords should be particularly alert to the following risks:

• Assuming the lease is automatically terminated. Neither liquidation nor receivership automatically terminates a lease. In a liquidation, the lease continues unless disclaimed by the liquidator. In a receivership, the receiver cannot disclaim the lease at all.
• Failing to compel the liquidator's election. In a liquidation, if the landlord does not require the liquidator to nominate its position on the lease, the liquidator may delay its decision indefinitely, leaving the landlord in limbo.
• Signing overly broad deeds of entry. In a receivership, landlords should resist giving the receiver unlimited access to the premises or broad releases without appropriate protections.
• Clearly identify the landlord's property. The lease should clearly identify any landlord-owned property at the premises, supported by a register containing photographs, serial numbers and other identifying details.

Conclusion

Liquidation and receivership each present distinct challenges for commercial landlords. A landlord's rights, and the steps it should take to protect its position differ materially depending on which process is in play.

The key message is to act promptly and seek specialist advice at the earliest opportunity. Landlords who understand the differences between administration, liquidation and receivership, and who have taken proactive steps to protect their position through effective lease drafting and security arrangements, will be best placed to minimise risk and preserve value when external administration occurs.

If you are a landlord facing issues related to a tenant entering liquidation or receivership, we recommend seeking legal advice from a qualified commercial lawyer. Lander & Rogers' legal experts have extensive experience in this area and can provide tailored advice to meet your specific needs.